Durbin targets private student loan defaults
By Ylan Q. Mui,
A top Senate Democrat took aim at the private student-loan industry Tuesday, calling for new rules that would allow educational debts to be wiped away during bankruptcy.
Majority Whip Richard J. Durbin (D-Ill.) convened a Senate judiciary subcommittee hearing Tuesday to address what one consumer group has called the nation’s next potential “debt bomb.” Research by the Federal Reserve Bank of New York found that Americans owe about $870 billion in student loans — surpassing the amount of outstanding credit-card debt or auto loans. More than a quarter of borrowers had past-due balances, a figure higher than previously reported, the study found.
Of particular concern to lawmakers is the high rate of default on loans by students at private institutions, many of them for-profit colleges. Government data show that roughly 15 percent of students who attended for-profit schools defaulted on their loans in 2009, the most recent year for which statistics are available, more than double the rate at public colleges.
Those missteps can haunt borrowers for decades, because consumers cannot discharge student debts if they file for bankruptcy. Other loans, including mortgages and credit-card balances, can be cleared away. Americans 60 and older accounted for nearly 5 percent of past due student-loan balances, the New York Fed found.
“It is clear that too many students have been steered into loans that they will not be able to repay and that they will never be able to escape,” Durbin said in his opening remarks.
Durbin has sponsored legislation that would allow private student-loan debt to be discharged in bankruptcy, though consumers would still be responsible for paying federal student loans. Durbin has held several town halls in Illinois on the issue, and Tuesday’s hearing was the latest attempt to drum up support in the face of partisan gridlock on Capitol Hill.
“The student debt crisis in this country is largely ignored by Congress,” he said. “There are a lot of lives that are being changed.”
Some advocacy groups say the legislation does not go far enough. Deanne Loonin, a lawyer with the National Consumer Law Center, said she wants all student loans to be able to be discharged. She said she works with consumers in their 80s whose Social Security checks are being garnished to pay for old student loans.
“The government can come after people forever — until they die,” Loonin said.
Senate aides said Durbin is considering attaching the bill to a related proposal on student-loan interest rates that has a higher chance of movement this session, though it is also controversial.
On July 1, a five-year reduction in the interest rate for new federally subsidized Stafford loans will expire, doubling the rate from 3.4 to 6.8 percent. Sen. Jack Reed (D-R.I.) and Rep. Joe Courtney (D-Conn.) have introduced a bill that would keep the rate at its current level. The lawmakers said that letting it rise could cost some students as much as $5,000 over 10 years. President Obama has proposed extending the lower rate through 2013. The Congressional Budget Office estimates that would cost taxpayers about $6 billion.