In 2005 Congress made a few changes to the bankruptcy code. Some of those changes got a lot of attention. Others did not. One of the stealthier changes extended the same protections against discharge in Bankruptcy to private student loans that Federally insured student loans had had for years. It is probably not a coincidence that the availability of private student loans skyrocketed shortly thereafter, and I don’t think anyone can say that this was really unexpected.
The unexpected part was that Congress had just created a scenario where those newly protected private student loans were going to be getting repaid at the expense of Federally insured student loans.
Go ahead. Read it again. Yes, Congress really did pass a law that encouraged people to repay their private student loans instead of making payments on their federally insured student loans; and you used to wonder why we have a budget deficit.
Here is why. If you legitimately do not make enough money to repay your student loans, you can put your federally insured student loans into some form of alternative payment system that is income based or income contingent. In those cases, your payment can be as low as $0. In many cases the payment will not keep up with the accruing interest, so even though the debtor is making payments, the principal balance is not declining. Those loans are not getting paid, even if the debtor is keeping up with the accruing interest. After a long enough number of years, the remaining balance on those loans will be forgiven. That is an unfairly brief summary, but it covers the high points.
You can’t do that with your private student loans. They don’t participate in the income based or income contingent repayment programs, and if the debtor doesn’t make the payments, they will proceed with the appropriate legal steps to begin garnishing the debtor’s wages. Well, if you can’t afford your loan payments, you really can’t afford to have your wages garnished. So, the net result of all of this is that people with more student loan debt than they can pay wind up paying their private student loans (at least sometimes) and NOT paying their federally insured student loans. There are days when I think that I want to know just who thought that was such a great idea. Then, there is the rest of the time.
There are bills currently pending in Congress to change this. They are Senate Bill 114 and House Resolution 532. Last time I checked neither piece of legislation had so much as poked its nose out of committee. In other words, the private student loan lobbyists are doing their jobs better than the rest of us. So, if you have a mind to write your Congressmen and request intelligent, sensible governance; this wouldn’t be a bad issue to include.