The law currently makes it nearly impossible for borrowers to cancel student loan debt by filing for bankruptcy. But the Consumer Financial Protection Bureau (CFPB) recently took a stand on the issue, saying that due to the pervasiveness of student loan debt across the country and the lingering effects of the recession, many college graduates are suffocating under debt they cannot (and will not be able to) pay back.
For that reason, the CFPB is recommending that Congress make it easier for people who can’t pay off their private student loan debt to discharge it through bankruptcy. In a 130-page report, published last week, they said:
Bankruptcy discharge may be an essential protection against consumer injury that might otherwise result when a consumer lacks the income or other means to manage debt. However, that benefit generally does not apply to student loans. These loans are virtually immune from discharge in bankruptcy.
While this is a complicated issue, there’s no doubt that many people are struggling and have very little hope of paying off their loans.
How Many Private Loans Are in Default?
The CFPB says that cumulative defaults on private student loans are greater than $8 billion. As a means of comparison, total private student loan debt in the U.S. is equal to about $150 billion (a fraction of the total student loan debt, which is estimated to be more than $1 trillion).
And there may be more defaults on the way for people whose monthly payments represent an unsustainable portion of their monthly income. Among recent graduates of four-year colleges, the CFPB estimates that one in ten have to pay at least 25% of their income toward student loan payments.
Arguments Against Bankruptcy Protection for Private Student Loans
Those who oppose changing the bankruptcy laws argue that people who signed up for student loans have an obligation to pay them, and that allowing those obligations to go unfulfilled would mean financial trouble for the lenders. At a hearing for the Senate Banking subcommittee last week, where this issue was discussed, Senator Bob Corker of Tennessee said that filing for bankruptcy protection for student loans is “one of the most damaging things that a consumer can possibly do.”
Opponents of the change also argue that allowing people to discharge those loans through bankruptcy would make student loans more expensive in the future by forcing lenders to raise the interest rates to make up for greater losses. And they point out that even if private loans could be discharged through bankruptcy, federal loans (which make up more than 85% of total student loans) could not be.
Arguments In Favor of Bankruptcy Protection for Private Student Loans
Others believe that changing the law would be a good thing. With the unemployment rate (and underemployment rate) for young people still high, and with the average student loan debt seeming to grow bigger each year, many student loan borrowers say their lives and the national economy will be irrevocably altered without some intervention.
Many people who are facing unmanageable student loan debt have resigned themselves to never paying it off – like Elie Mystal at the Above The Law blog. On a broad scale, if a generation of college graduates are not engaging in the usual economic activities that define post-college life (like buying a house), there could be a negative impact to the U.S. economy. And in fact, the CFPB has said that is a real concern. Which is a reason to give those people currently being crushed by private student loan debt a chance for a blank slate.
What’s Your Opinion?
We think this is an important issue – especially since our mission is to help people get out of debt. What drives us is to assist you in paying off your debt faster than you ever imagined. But we also know that, due to difficult circumstances, in some cases it may not be possible to pay off all one’s student debt.
Most importantly, we want to know what you think. Should the law be changed? Is there another option that no one has mentioned yet? Tell us in the comments below.
Image credit: LifeSupercharger