Student loans are a major issue in contemporary society. The possibility of getting your student loan discharged is all but gone. Prior to 2005, private student loans were dischargeable without any showing of an “undue hardship,” as is required by the federal government in discharging government-backed student loans. The passage of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), established that private student loans were given the same privileged protection under bankruptcy law as the federally sponsored student loans. There are arguments for and against the returning of the private students loans to their original privilege protection.
The foundation for providing private students loans this heightened protection is the idea that bank’s lack security in providing the loans. It has become common for private lenders to require a co-signer on student loans, but should there be no co-signer the bank is simply taking a chance on the student. The lender has no control over the student’s major or how hard they study. The lender has no ability to estimate the risk associated with each student loan, and is given no security in the student’s future potential. Unlike a mortgage or car loan, the lender has no collateral or property to hold against the loan in security. The bank cannot repossess the delinquent student’s degree in default because the degree is worthless to anyone other than the student who obtained the knowledge. With the added protection, it is possible the private lenders begin to give more favorable treatment to the student loans like the federal government. Deferred payments or a window of time following graduation before payments are first due are not normally given by private lenders but is by the federal government. Rates associated with private students loans could become more favorable like the government’s because there is added protection against discharge under bankruptcy. The private lender will argue this added protection is a way of deterring any possible fraud that may come from someone trying to skip out on his or her education bill. As important as an education is, the payment of receiving said education is just as important.
On the contrary, it is ridiculous to provide a private entity the same level of protection as the federal government. The terms and conditions of federal loan are significantly more favorable than those provided by private lenders. Giving this added protection goes against the basic policy behind bankruptcy, that debtors should be given the opportunity to start over. If private lenders are given privileged protection under bankruptcy it would go against the idea behind bankruptcy, see what went wrong the first time, learn, and make smarter decisions moving forward. Denying the discharge of private student loans would allow banks to put an irremovable ankle weight on students that picked the wrong major. Private lenders do not share the same interest in education as the government. One of the federal government’s goals is education and if providing federally backed student loans increases the likelihood that an individual seeks higher education than the government succeeded. Private lenders have no similar interest, their ultimate goal is profiting, and whether the individual gets educated is irrelevant.
Ultimately, whatever your personal views are on how private student loans should be handled, should you ever find yourself contemplating whether or not to contact a bankruptcy lawyer, know that the more information you provide, the more helpful the bankruptcy lawyer will be throughout the entire process.