Forgotten Borrowers: Protecting Private Student Loan Borrowers through State Law

Abstract

Private student loan borrowers arguably have the fewest protections of any users of credit in the United States. In a scarcely debated amendment to federal bankruptcy law, in 2005 private student lenders gained the same protections against discharge previously afforded to federal student lenders. Yet, private student loan borrowers received none of the rights available to federal student loan borrowers. These include income-driven repayment, relief from repayment on disability, loan discharge for fraud or closed schools, and public service loan forgiveness. Private student loan borrowers thus have neither the bankruptcy protections afforded to non-student loan debtors nor the repayment and debt relief rights of student borrowers under the federal loan program.

This lack of consumer protection has particular consequence when considering the plight of for-profit school students saddled with private student loans. Some of the worst abuses in the proliferation of higher education debt have been perpetrated against for-profit school attendees. The vast majority of private student loans are co-signed, typically by older family members. This combination of private student loans and for-profit school attendance impacts a much broader range of consumers than would a comparable number of federal student loans.

We suggest two types of state legislation to protect these debtors. For prospective for-profit school private borrowers, we propose incorporating some of the protections of federal student loans through the use of a state equivalent to the Federal Trade Commission “Holder Rule.” For all private student loans, we propose a requirement that private lenders engage in a mandatory settlement process, similar to those used by states during the recent foreclosure crisis, as a pre-requisite to using state courts for debt collection.

Keywords: student loans, private student loans, for-profit higher education, proprietary school, model law, state law