Bankrupt student loan holders may have access to a new safety net if they have private loans, thanks to a bill introduced to the United States House of Representatives earlier this month.
The “Private Student Loan Bankruptcy Fairness Act of 2010″ was introduced in the House April 15 and if passed, would make it easier for students to terminate their private student loan debt if they declare bankruptcy.
“This bill will help to ensure that people who seek higher education to better their futures are not dissuaded from doing so by the threat of financial ruin,” bill sponsor Rep. Steve Cohen, D-Tenn, said in his address of a committee when the bill was introduced.
As the law stands, students who declare bankruptcy have to keep paying back their private student loans, but other forms of private lending can be waived when a student declares bankruptcy. This bill would place private student lenders on the same level as other private lenders, according to a statement from Cohen.
Cohen was not alone in crafting the bill. Rep. Danny Davis, D-Ill., played a part in bringing the bill to the Subcommittee on Commercial and Advertising.
Ira Cohen, spokesperson for Davis, said the bill is making its way through the legislative process, but the amount of partisanship that will ensue will make the bill’s journey “cumbersome and difficult.”
Steve Cohen said in a statement it can be difficult for child support responsibilities, overdue taxes, criminal fines and private student loan debt to be lifted once one has declared bankruptcy. He added private student loan debt should not be on that list.
“Students who are overwhelmed with student loan debt are in need of some relief when they are in dire circumstances,” Ira Cohen said.
University of Wisconsin Director of Financial Aid Susan Fischer said 88 percent of UW students who take out private loans also take out federal loans, which she said are the smarter loans to use.
The interest rates for private loans are also much higher than those of federal loans and have been subject to change. Ira Cohen said it is unclear why banks that carry student loans have high interest rates because the federal government insures all their debt. The banks’ risk of privately lending to students is essentially zero.
Fischer said federal student loans come with many provisions and protections private student loans do not afford to students, including different forgiveness provisions and steady interest rates.
While Fischer added federal loans seem to be the better choice for students to finance their education, Ira Cohen said currently federal loan debts are not dischargeable when a student hits bankruptcy.
She said although students need to pay for college and private loans can be necessary, she encourages students to choose the route of federal loans, what she referred to as “better money,? rather than private.