Private Student Loan Debt to be Dischargeable in Bankruptcy Under House Bill

U.S. Congressmen Steve Cohen (D-Tenn.) and Danny Davis (D-Ill.) Wednesday introduced legislation that would treat privately issued student loans the same as other types of private debt in bankruptcy.

This is the fifth time a bill like this has been introduced in the House, but Cohen feels it stands a better chance now given the current focus on student loan debt, including a reported rise in student loan debt among members of Congress.

“Congress taking action on student loan debt is long overdue,” said Cohen in a statement.  “People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin. Our bill takes a modest but important step in achieving this goal.”

The bill, HR 532, would amend the U.S. bankruptcy code to allow private student loans to be discharged in bankruptcy proceedings. A report from the Consumer Financial Protection Bureau (CFPB) last year indicated that some $150 billion of the $1 trillion in outstanding student loan debt was from private lenders.

But the growth in private student loans is likely to slow in coming years.

The Student Aid and Fiscal Responsibility Act, which got attached to and passed with the healthcare reform bill in 2010, effectively killed federally guaranteed private student lending. Going forward, all student loans that would have been previously guaranteed by the government are going to be originated directly by the U.S. Department of Education.

Cohen’s bill would not allow federal direct loans to be discharged in bankruptcy.

There are still plenty of private lenders participating in the student loan market. The Federal Direct Student Loan Program does not originate loans to pay for non-accredited schools. Federal direct loans also only cover tuition and certain approved fees, but not all costs to attend college. Private lenders can provide loans to cover some gaps. Chase, among other large lenders, has a formal program to cover federal loan shortages.

The recent focus on the magnitude of the student loan debt problem might help the bill’s prospects. Just last week, credit reporting agency TransUnion said that more than half of student loan accounts are in deferred status. The bill has already picked up 14 co-sponsors.

Individual members of Congress are also reporting more student loan debt that they are responsible for paying.

According to a report Thursday from the Center for Responsive Politics, the amount owed by U.S. Representatives and Senators in 2011 totaled as high as $4.3 million, compared to a ceiling of $2.4 million in 2008. Congressional finance disclosures require members to only report ranges of debt rather than hard numbers. The total number of Congressional student borrowers did definitively grow over the same time, though, from 30 in 2008 to 46 in 2011.

The bill has been referred to the House Committee on the Judiciary, of which Cohen is a member.

Correction: A previous version of this story indicated that the Federal Direct Student Loan Program does not lend to students at for-profit colleges. In fact, the Department of Education last year published a cohort student default study that included for-profit college loans. The article has been updated to reflect this.