Congressman Plans Legislation That Could Change Bankruptcy Treatment of Private Student Loans

The chairman of a U.S. House subcommittee says he plans to introduce legislation that could change the treatment of private student loans in bankruptcy.

Rep. Steve Cohen, D-Tenn., chair of the House Judiciary Subcommittee on Commercial and Administrative Law, announced he would introduce legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.”  His announcement came after the subcommittee he chairs held a hearing on “An Undue Hardship? Discharging Education Debt in Bankruptcy.”

“Unlike federal student loans, private loans lack important consumer protections, leaving financially distressed borrowers with little option but to seek bankruptcy relief,” Cohen said. “That’s not right and certainly not fair to those who have worked so hard to realize their dream of a college education.”

In 2005 Congress amended the federal bankruptcy code to extend the same restrictions on a borrower’s ability to discharge private education debt in bankruptcy that long have been in place for federal student loans. In both cases, borrowers must prove in an adversary proceeding before a bankruptcy court that failure to discharge the student loan debt would pose an “undue hardship.”

Witnesses during the subcommittee’s hearing noted that one of the problems facing borrowers is that Congress never defined the term “undue hardship,” leaving it to the determination of individual bankruptcy court judges. They urged Congress to draft a standard for undue hardship that could be consistently applied.