Private Student Loans and Bankruptcy
By higheredwatch Posted in Economy — Comments (2) / Email this page » / Leave a comment »
Criminal fines, overdue taxes and private student loans. These three seemingly unrelated items all have one thing in common: they are nearly impossible to discharge when declaring bankruptcy. The first two make sense: they are societal debts that should be paid because they are backed by taxpayer dollars. But there seems to be little reason that private student loans should be afforded a higher status than any other private debts, such as a mortgage or car loan.
Recently, Sen. Richard Durbin (D-IL) has moved to take these special bankruptcy provisions away from private student loans by introducing legislation in June. Not surprisingly, student loan providers have been up in arms against this bill, arguing that the bankruptcy exemption allows riskier students to receive private loans because the companies know the debts must be paid back.
The data, however, does not bear out this claim. Comparing credit scores of Sallie Mae borrowers from before and after private student loans were given bankruptcy exemptions shows only a modest increase of 0.2 percentage points in the number of private loan borrowers with a FICO score under 650. In all, the highest risk borrowers still made up just 7.7 percent of Sallie Mae’s overall private loan portfolio.
The need for bankruptcy exemption does not make basic economic sense. Unlike federally-backed loans, which come with a set interest rate, private lenders can (and do) raise interest rates and other fees to cover the cost of lending to a risky borrower. Perhaps if private loan providers weren’t charging interest rates of up to 18 percent, then they wouldn’t have to worry about so many of their clients going bankrupt in the first place.
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Are these lending institutions under moral suassion to charge lower rates than the risk calculations would otherwise dictate? If so, the difficulty of discharging these loans in bankruptcy partially indenifies the loan institution for the access risk. If not, Sen. Durbin has taken a refreshing break from comparing US soldiers to nazi concentration camp guards and has put forward a potentially decent piece of legislation.
James Hansen - Scott THomas Beauchamp with a PhD.
I have $15,000 in private loan debt (and still haven't graduated yet, although I'm not needing to take out any more private loans in the next eight months) that is being hit with between 9 and 10.25% interest... and people tell me I'm getting fairly good rates (I have friends who are paying closer to 13-15% for theirs, which is into the territory of credit cards and early 1980's mortgages at that point). It's getting to a point where I'm wondering if I'm going to be able to go straight to grad school (hoping to get my Ph.D. in Economics, and am applying to Washington University, George Mason, and University of Chicago) if it means that another four years of education might mean my loans tack on another $10,000 in interest in doing so... may just have to get a job at an investment bank for a year or two to pay everything off first.
Sigh.
"I don't understand why the same newspaper commentators who bemoan the terrible education given to poor people are always so eager to have those poor people get out and vote." - P.J. O'Rourke