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Regulators Ask Banks to Work With Student Loan Borrowers; Bankruptcy Bill Pending

Monday, July 29, 2013
By Jeff Bater

Federal regulators are asking banks to work with borrowers having a hard time paying off student loans, an issue that has captured the attention of Congress and prompted legislation to make private student loans dischargeable in bankruptcy.

The Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency issued a statement July 25 encouraging institutions to work constructively with private student loan borrowers experiencing financial difficulties. “Prudent workout arrangements are consistent with safe and sound lending practices and are generally in the long-term best interest of both the financial institution and the borrower,” the statement said.

Student loan borrowers who are unemployed or underemployed may face hardship in making payments on their private student loan debts after separation from school or during periods of economic difficulty, the agencies said.

“Current interagency guidance permits prudent workout and modification programs for retail loans, including student loans, and provides that extensions, deferrals, renewals, and rewrites may be used to help borrowers overcome temporary financial difficulties,” they said. “Institutions that have private student loan workout programs should provide borrowers with information that clearly explains the programs, including eligibility criteria and the process for requesting a modification.”

Legislation on Student Loan Debt

In February, Rep. Steve Cohen (D-Tenn.) introduced a bill, H. 532, that would make private student loans dischargeable in bankruptcy. He hosted a Capitol Hill briefing June 17, with experts discussing their support for the legislation (25 BBLR 868, 6/20/13). Cohen said he believes that student loans are a major issue Congress needs to address, and, in a news release, added that private student loan debt is particularly problematic because such loans can carry very high interest rates and fees, are marketed aggressively to unsuspecting and vulnerable people, and lack many of the consumer protections of federal student loans.

“With students relying more and more on student loans to pay for the rising cost of college, Congress should be looking at ways to make it easier for students to attend college,” Cohen said.

One panelist, Daniel Press, a member of the board of directors at the National Association of Consumer Bankruptcy Attorneys and a practicing bankruptcy attorney, said that private student loans are a big culprit behind many of the filings he sees. Sandy Baum, a senior fellow at the George Washington University Graduate School of Education and Human Development, said that it was hard to see why bankruptcy would not be a good solution.

Baum noted that only a small percentage of student loans would actually be discharged in bankruptcy and that this solution would serve only those in the most dire circumstances. She further stated that making private student loans dischargeable in bankruptcy would directly punish lenders who had made the loans in the first place despite knowing the likelihood of default, as opposed to some sort of government-sponsored forgiveness at taxpayer expense that would compensate the lenders.

Asked whether the bill would create a lack of access to private student loans, Baum said lenders should be more careful about lending and that less access would likely provide a better outcome for some borrowers, who would otherwise end up worse off than if they had never taken out the loans at all.


The regulators' statement is viewable at The Cohen release can be read at

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