2.6 million student borrowers could get rid of debt via bankruptcy: report

  • Private student debt is not defined in the bankruptcy code, which makes the terms of cancellation confusing.
  • The Student Borrower Protection Center found that 2.6 million borrowers could be eligible for a $50 billion rebate.
  • But student loan companies have engaged in “predatory tactics” to prevent that from happening, according to the report.

Millions of private student loan borrowers could be eligible to erase their debt – they just don’t know it yet.

On Thursday, the Student Borrower Protection Center (SBPC) released a report that 2.6 million borrowers with private student debt could be eligible for loan forgiveness of up to $50 billion in the event of bankruptcy. .

But, according to the report, private companies have “systematically lied to borrowers for years” by continuing to collect debts from those who had already gone through the bankruptcy process. They also told these borrowers that they were not eligible for this process when they were not.

“Companies have engaged in this doublespeak in order to avoid liability under securities fraud laws while increasing their profits,” the report said. “Through their misrepresentations, student loan companies collected potentially hundreds of millions of dollars in payments on debts that borrowers did not – or did not have to – owe.”

Private student debt accounts for $140 billion of the $1.7 trillion in student debt in the United States. Since private student debt is not defined in the US bankruptcy code, it can be difficult for borrowers to determine if they qualify. SBPC argued that many are, but some student loan companies have engaged in tactics that allowed those borrowers to pay their debt when they didn’t have to. This exacerbates a burning problem in Washington, where lawmakers are cracking down on for-profit colleges and working to prevent predatory behavior that pushes the borrower into more debt than they can repay.

Private student debt is not defined in the bankruptcy code

Whether it’s federal or private student debt, getting rid of it through bankruptcy can be an arduous process. The borrower must prove that the loans have caused him “undue hardship”, which means that he cannot maintain a minimum standard of living, that his situation is unlikely to improve and that he has made an effort in good faith to repay its debt.

However, proving these standards in court is difficult, and even more so with private student debt. Because private student debt is not defined anywhere in the U.S. bankruptcy code, borrowers filing for bankruptcy are often referred to as having “qualified student loans,” which are loans made for educational expenses. direct education expenses like tuition and books, and the loan can only be used for those qualifying expenses.

But generally, these types of loans were not eligible for release if they did not also meet the undue hardship requirement. The Student Loan Protection Center argued that many of these loans had been misclassified and could in fact be canceled through bankruptcy, saying many of them did not meet the narrow criteria.

Student loan companies don’t want borrowers to know.

Private companies use ‘predatory tactics’ to avoid bankruptcy

Commercial lenders began disbursing “direct to consumer” (DTC) loans in the early 2000s, and because they often exceeded the cost of attendance and were given to students from ineligible schools, they were not qualified student loans and therefore eligible for bankruptcy discharge.

But some big loan companies, like Sallie Mae and its successor Navient, wanted to prevent that. The company asked borrowers receiving DTC loans to certify that the loan was a qualified student loan and therefore not eligible for bankruptcy discharge – one of the “predatory tactics” the companies have taken against such borrowers.

Navient declined Insider’s request for comment.

Additionally, even if borrowers successfully pass the bankruptcy process, the bankruptcy code does not require disclosure of specific loans that have been forgiven, which means that private lenders can continue to collect debts that borrowers still think they owe.

30% of private student debt load is eligible for cancellation

Between 2005 and 2011, private lenders disbursed $98 billion in student loans. SBPC calculated its estimates by determining the portion of this debt used by ineligible students, the portion used in ineligible schools, and the portion used for ineligible expenses, concluding that 30% of these loans were ineligible loans. , and therefore eligible for discharge.

Given the confusion surrounding the bankruptcy process for federal and private loans, some lawmakers have attempted to improve the process. Insider reported in August that Senate Majority Whip Dick Durbin and Sen. John Cornyn of Texas introduced the FRESH START Through Bankruptcy Act of 2021, which would allow borrowers to apply for the discharge of their federal student loans after 10 years.

And in July, Representatives Steve Cohen, Danny Davis and Eric Swalwell introduced the Private Student Loan Bankruptcy Equity Act, which would treat private student loans the same as other forms of private debt, making it easier thus the process of discharge from their bankruptcy.

“Private education debt is no different from other consumer debt,” Davis said in a statement. “It involves private profit and deserves no privileged treatment.”

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