Obama Must Take a Stand on Private Loan Bankruptcy Bill

On Tuesday, Sen. Dick Durbin (D-IL) held a hearing before a Senate Judiciary Committee subpanel promoting legislation that would allow financially distressed borrowers to discharge their private student loans in bankruptcy. If Durbin has any hope of getting traction on this important bill, he’s going to need the help of another powerful Illinois politician: President Obama, who has so far avoided getting involved in this fight.

At issue is a provision that federal lawmakers slipped into the infamous 2005 bankruptcy bill, at the behest of the student loan industry, making it virtually impossible for borrowers to discharge private student loans. Congress approved the legislation without any public debate or notice.

For most unsecured debt, a borrower in crisis can file for bankruptcy — either through Chapter 7 liquidation or Chapter 13 reorganization. But there is a short list of debts that the law treats differently, allowing discharge in only the most extreme circumstances, such as child support responsibilities, overdue taxes, and criminal fines. That makes sense.

Student loans, however, are also on the list of debts that generally can’t be discharged. One could make the argument that exempting federal student loans from bankruptcy is justifiable since they are backed by taxpayer dollars and come with borrower protections in cases of economic hardship, unemployment, death, and disability. But there is no good reason for private student loans, which are not government-backed and generally lack these types of protections, be accorded the harshest bankruptcy status. Why should individuals who borrow private loans to better their lives and invest in their education and future be treated more harshly than those who rack up credit card debt at the mall?

Shielding private loans from bankruptcy means that repayment extends essentially forever, leaving even the most destitute borrowers with no way out. And the bankruptcy exemption has made private student loan providers less cautious about peddling high-cost loans to students who may never be able to repay them. Treating private loans like other forms debt would at least make them think twice before providing high-interest loans to people who can ill-afford this debt

Senator Durbin’s bill would treat private student loans the same as most other forms of consumer debt in bankruptcy. This change is sorely needed. However, the outlook for the measure is dim. Durbin has offered variations on this legislation for the last several years, but the student loan industry’s friends in Congress have always managed to block these measures from coming up for a vote on the Senate floor.

Shockingly, the White House has never taken a stance on this clear-cut issue. That’s not acceptable. The president must get off the sidelines and use his bully pulpit to help those who don’t have the means to escape their ever-spiraling private loan debt. Only then will this issue get the attention it deserves.

For a president who appears to be genuinely concerned about helping student loan borrowers with unmanageable debt, that should be a no-brainer.