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Private student loan borrowers struggle with debt

by | Jul 30, 2012 | Debt Management, Firm News

Federal student loan borrowers in Tennessee and nationwide may be faring better in the economic recession, for several reasons.

As a preliminary matter, many private educational loan borrowers might be in worse shape for simple reason that they didn’t qualify for federal loans. Many private lenders took advantage of looser lending practices as the housing bubble ballooned. In fact, a recent report by the U.S. Department of Education finds that many private lenders offered student loans to borrowers with increasingly lower credit scores.

Unlike federal loans, many private loans don’t offer any options when borrowers are unable to make their payments. One such accommodation is flexible terms when borrowers return to school or suffer an unexpected financial hardship.

Private educational loan borrowers exploring the option of bankruptcy won’t find relief there, either. Unlike other types of consumer loans, educational loans typically aren’t dischargeable in bankruptcy, absent a showing of undue hardship — a high evidentiary standard met only in rare cases.

However, the Consumer Financial Protection Bureau and the Department of Education have issued a report suggesting that this area of bankruptcy law should be changed. In 2005, bankruptcy law was changed to shield private educational loans from discharge. However, the study questioned the rationale behind that change, since it found scant evidence that the change had resulted in lower loan prices to consumers or greater credit access.

Not surprisingly, many private educational lenders do not want bankruptcy law to revert to pre-2005 status. Some argue that changing the law will result in a rush of bankruptcy filings, especially by recent graduates. However, at least one private lender, Sallie Mae, has supported a bankruptcy option for loans after borrowers have made payments for 5 to 7 years. If you need advice regarding your debt management and would like to explore alternatives to bankruptcy, an attorney can be your best resource.

Source: The Baltimore Sun, “Report: Let private student loans be discharged in bankruptcy,” Eileen Ambrose, July 29, 2012

  • Our firm handles situations similar to the one discussed in this post. If you would like to learn more about our practice, please visit our Memphis Alternatives to Bankruptcy page.