Congress Proposes Relief for Student Loan Borrowers

New bills would restore the ability to discharge commercial student loans in bankruptcy proceedings.

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As college costs continue to rise, and in an economic climate where family incomes are suffering, more and more students must borrow in order to gain access to higher education. The result is that an increasing number of graduates find themselves saddled with high educational debt. As we previously reported, the Project on Student Debt estimates the average debt for 2009 bachelor’s degree recipients at $24,000. Students with advanced degrees may carry an even heavier burden.

According to a recent study by the John J. Heldrich Center for Workforce Development at Rutgers University, only 56 percent of 2010 graduates were able to find work. The New York Times and others have reported that the amount owed in student loans last year was greater than credit card debt and is expected to exceed $1 trillion this year. The result is many student loan borrowers are unable to repay their loans.

[Get tips on how to manage your student loans.]

In an effort to tackle this growing issue, Senators Dick Durbin (D-Ill.), Al Franken (D-Minn.), and Sheldon Whitehouse (D-R.I.) have introduced the Fairness for Struggling Students Act of 2011 in the U.S. Senate. Representatives Steve Cohen (D-Tenn.), Danny Davis (D-Ill.), John Conyers (D-Mich.), and George Miller (D-Calif.) introduced the related Private Student Loan Bankruptcy Fairness Act of 2011 in the House of Representatives. Both bills would restore the ability to discharge commercial student loans in bankruptcy proceedings, reversing a 2005 change to the law for borrowers who find themselves unable to make payments on their loans.

As explained in a press release from Senator Durbin’s office: “Before changes were made to the bankruptcy code in 2005, only government issued or guaranteed student loans were protected during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education. Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005, so that privately issued student loans will once again be dischargeable in bankruptcy.”

Representative Cohen emphasized the need for the bill, echoing the sentiment of many who are concerned with the nation’s rapidly rising educational debt: “People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin.” He added, “The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents or other unforeseen life events, they will be protected. My bill takes a modest but important step in achieving this goal.”

Bankruptcy protection is particularly important when it comes to private and commercial student loans because these loans are not eligible for the repayment assistance, forgiveness, and relief programs that accompany federal student loans. For example, neither the Income-Based Repayment plan nor the Public Service Loan Forgiveness program is available for commercial loans. Access to these and other forgiveness programs is a significant factor to consider when choosing which types of student loans you should borrow to help finance your higher education.

[Find out more about forgiveness and repayment programs.]

Both bills have garnered the official backing of at least 35 organizations, including the American Federation of Teachers, The Institute for College Access & Success and its Project on Student Debt, and the National Consumer Law Center. In a letter to Senator Durbin, they expressed their support, stating, “Your bill would restore fairness for struggling Americans who pursued the American dream by going to college, only to find themselves in financial distress.”

The bills are currently in committee in their respective chambers. We will be tracking the progress of this significant legislation and will keep you informed.

Radhika Singh Miller is a program manager for Educational Debt Relief and Outreach at Equal Justice Works. In 2008, she served on the Student Loans Team in the Negotiated Rulemaking for the College Cost Reduction and Access Act (CCRAA) and has extensive knowledge of this landmark educational debt relief legislation. Miller graduated from Loyola Law School Los Angeles and was most recently a staff attorney at the Partnership for Civil Justice, focusing on constitutional and civil rights litigation and advocacy.