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Private Student Loans: More Important than Child Support and Taxes?

Robert Shireman | May 30, 2007

Last week, the Chronicle of Higher Education reported on an internal strategy document from Sallie Mae listing the company’s goals in lobbying the new Congress. Not surprisingly, at the top of the list was the need to "Protect FFELP economics" -- in other words, to preserve the excess government subsidies that lenders receive on federal student loans. (These were discussed in yesterday's blog item, which was written by Higher Ed Watch staff).

The number two item on Sallie Mae’s list might surprise some readers. It wasn’t increasing federal student loan limits or beating back the loan consolidation companies that have been trying to steal away Sallie Mae's borrowers. It was bankruptcy; specifically, preserving the special status that private student loans gained in the broad changes to bankruptcy laws that Congress enacted in 2005. To Sallie Mae, that provision is the key to its version of "private credit economics." The company doesn't have to think twice about providing high-interest loans to people who will likely have trouble paying them back because this 2005 provision allows the lender to go to the front of the line in bankruptcy court, leaving other creditors in the dust.

For most unsecured loans, the debtor who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of the various loans. But there is a short list of debts that the law subjects to a different standard, allowing for discharge in only the most extreme circumstances. Generally the items on this special list make intuitive sense; for example, it seems appropriate for it to be especially difficult for people to escape child support responsibilities, overdue taxes, and criminal fines.

Federal student loans don’t quite seem like they deserve to be on that same list, and until 1998 they were not. Instead, there was an intermediate approach: they had special treatment, but only for the first seven years in repayment. After that, they were treated like other debts. There is at least some justification for making federal loans hard to discharge: they are backed by taxpayer dollars, and they come with some borrower protections in cases of economic hardship, unemployment, death, and disability.

But private student loans? There is no good reason that they should be accorded any heightened status, much less the exalted category that competes with criminal fines, child support, taxes, and now federal student loans. How and why did they gain this status in the 2005 bankruptcy bill? No one seems to know. Like one of those earmarks without a known parent, there were no congressional hearings on the idea. There is nothing in the Congressional Record explaining the reasons behind the change.

Shielding private loans from bankruptcy means that repayment demands can essentially extend forever, leaving even the most destitute borrowers with no way out. This makes lenders less cautious about making high-cost private loans to people who may not be able to afford them, as well as to students at schools with low completion and job placement rates. Many of the private loan horror stories we have seen in the media are of exactly that type: high risk, high interest.

Treating private student loans like other unsecured debts would at lease cause a lender to pause before making some of those loans. For student and consumer protection advocates, removing the special treatment of private student loans in bankruptcy should be a top priority, just as preserving it is one of Sallie Mae’s chief objectives.

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Comments

student loans discharged in bankruptcy

Submitted by Heidi Wright (not verified) on June 5, 2007.
It is high time to revisit the bankruptcy laws regarding student laws -- both the system already in force disallowing discharge of federal student loans in bankruptcy and the current scheme to hide private loans' special treatment in bankruptcy claims.  Granted, no one should be able to live the high-life while ignoring his/her obligations to repay student laws. To do so would hurt the whole system and keep needy borrowers from legitimate access to education-related funds. On the other hand, as recent news accounts attest, the student loan system has deep pockets and much greater fiscal concerns that bankruptcy abuse. The ethical reasons behind the initiation of bankruptcy court was to free hard-luck borrowers from debtors' prison. There must be a way for people to put past errs behind them and start afresh -- especially when tuition costs can put people in debt over $100,000. Add interest (which is fixed once a borrower obtains a consolidation loan, preventing him from *ever* taking advantage of refinancing at lower interest rates) and time (try 20 to 30 years) and that can bring monthly payments to $800 or more a month. That's a hole some unfortunates truly may never be able to dig out of -- while loan companies and unethical educators shamelessly enjoy perks at borrowers' expense.

Bankruptcy Bill in Congress

Submitted by Linea Lee (not verified) on June 22, 2007.

It's absolutely insane that PRIVATE student loans enjoy special status. Can the editors of this (great) site please give us a list of the lawmakers involved and name the appropriate committees so we can write to express support?  Of all the organizations keeping an eye on the bill, I have yet to see any that list this information.  On the other hand, you can bet your bippy Sallie Mae & others will be crying big crocodile tears & forecasting gloom & doom if it passes.  (The only thing I'd like to see added is a provision criminalizing the loan-sharking they've been engaged in so far!--retroactively!) 

What can we do to be involved in changing the Law?

Submitted by Robert Garay (not verified) on August 2, 2007.
Like most of us do when we are young we make mistakes.  As most of you know at age 18 you can start with credit card debt and add on Student loans just to get an education and follow the American Dream.  I was attending a college for a full year and decided to attend a what I thought would be a better school that would not except the credits I had in the first school so I started all over and got myself more in debt.  The school pitches to the students and parents that living expenses plus tuition must be loaned if obviously the parents or the students cannot pay in full because classes will be run 24 hours a day and students that attend this school cannot keep jobs, so thats what I did.  I am now so behind in debt of student loans and want to have a fresh start and actually appreciate the benifits of going to college.  Why should people with credit card and other debts get to start fresh and they can do it over and over.  I studied and got my degree and have learned from my mistakes.  Now till I retire I will be paying student loan debt.  I have both Federal (in good standing) and Private (default) Loans and I want to be able to breath again.  What can we do to be involved?

Sallie Mae Private Student Loan

Submitted by James L Stover (not verified) on September 9, 2007.

I have two Sallie Mae Private Student Loans that I believe should have been discharged in my bankruptcy that I filed on 10-15-2005 right before the new law went into effect on 10-17-2005. To make a long story short, would anyone know,  were private student loans able to be discharged in bankruptcy prior to the law changing on 10-17-2005? Sallie Mae claims they were not but they are the last people I would believe. Thanks for any help. Jim Stover

Private Student Loans

Submitted by Tina (not verified) on September 14, 2007.

Like James (comment 9/9/07) I also have private student loans that I thought would be discharged in my bankruptcy, which was filed in November 2004. Of course Sallie Mae and the other loan holder National Education claims they were not discharged because they are "student loans". I asked them if they are guaranteed by the fed. government and if they are a not-for-profit. They said NO they are Private loans and a for profit entity. I said then I see no reason why these private loans, like my other debt would not be discharged in my bankruptcy. Anyhow they keep bugging me and I told them I am not paying because they were included in my bankruptcy in 2004 (prior to the newer 2005 legal standards) and I see no reason that they are not discharged, since they are not federally guaranteed loans. Anyone have any ideas about this? Am I right or am I wrong that prior to 2005 private student loans held no special status legally. OR is there some other legal loophole I don't know about that these companies are relying on. Tina

 

 

Private Student Loans

Submitted by James L Stover (not verified) on September 16, 2007.

Tina

                       I forgot to ask,    Are you paying on your Private loans after your BK?     

Jim   

private student loan

Submitted by scott (not verified) on December 5, 2007.
Did you get an answer about private student loans?  I also have an ongoing case about a 1997 private student loan.  I even have an old letter in which they admitted it was a "private" student loan.  Now I am being sued in state court.  A few lawyers I have spoken to keep focusing on hardship. But this is off the point.  Private student loans were dischargable in 1997.  Of course the loan companies deny that but why then did they want the law changed?  There would no need to change the law if private student loans were already impossible to discharge.  Does anyone have anything on this?

My cross to bear

Submitted by My life is over unless this changes (not verified) on September 21, 2007.

Naive and young, I signed on the dotted line with no clue that I was selling my soul.  My loans have more than doubled since graduating 12 years ago.  I have suffered severe depression, anxiety and lost out on job opportunities and even a place to live because of my student loan status.  All I wanted was an education and my "education" has done nothing for me.  I can't even get my transcripts. Something needs to be done about this. 

Keep your head up...

Submitted by PC (not verified) on October 1, 2007.

The tide will turn...keep your head up and things will change.

Hopefully, you will benefit from new legislation charging 15% of

your monthly discretionary income.

Private Student Loan Protections Will Be Struck Down...

Submitted by Paul Hupp (not verified) on October 1, 2007.

Private student loans will NOT be getting special treatment in bankruptcy much longer. The 2005 revision is under attack in the courts as we speak, and will be struck down. In addition, the nondischargability of federal student loans in bankruptcy is also under serious attack, and there will almost certainly be changes there also. I made a specific attack against the private student loan revision that Scammie Mae got inserted into the 2005 bankruptcy revisions.

Hang tight, after my case (Hupp V. Educational Credit Managment Corp., SD-CA) works it's way thru the 9th Circuit, we will see some big changes.

 

 

 

 

Paul, Has there been any

Submitted by Jeff (not verified) on April 2, 2008.

Paul,

Has there been any resolution to your case?

 

Private Loans Discharged

Submitted by Jim David (not verified) on April 16, 2008.
Paul,  I was wondering how your case is going.  I was also curious as to the basic facts of the case.  I am a disabled attorney who has had the federal student loans discharged under the disability discharge provision.  The private loans say "no way" to a disability discharge.  I had filed BK in 2001 and was led to believe that the private loans could not be discharged.  However, when the 2005 law went into effect, the provision that "extended protection to private student loans" woke me up to the fact that my private student loans had been discharged in 2001.  However, Sallie Mae acts like they did not have to obect to discharge in 2001 because they were protected.  They are clearly trying to bootstrap federal protection onto the private loans they make.  I am not paying them because all I have is disability income.  However, I am going to use the 2001 BK discharge as my affirmative defense when they finally file suit.  I really want to get involved in a class action against Sallie Mae for their fraudulent representations regarding private loans and discharge prior to 2005.  I also want to get involved in a class action against them for their under-handed methods of getting private loan protection in the 2005 act.  Sallie Mae's pre-2005 published and stated  conclusions of law regarding private loans even duped the BK lawyers.  Please let me know what is going on with you.  I would like to exchange ideas.

The case is going very

Submitted by Paul is Back...... (not verified) on April 25, 2008.

The case is going very slow. Have not made it to the 9th Circuit yet, but should be there before the end of the year. Once I hit the 9th Circuit it will take 1-2 years (could be longer) before it is over.

 Long story short-it is going to be a while........................

Will It Ever End?

Submitted by Jim (not verified) on December 11, 2007.

I too am in the same boat as many others when the subject of studemt loans is raised. We as students and former students took these loans in the hope of attaining not only a education but the foundation of what we would need for the job market--skills. Some of us achieved our goals and gained what we needed to get the job we had our sights set on and are attaining the monitary reward that is needed to pay off the student loans that we took to finance our education. Others, well, they fell short of their goals and ended up with less than what they expected. Either way, there was a risk involved. Risk on the part of the student and no risk on the part of the lender. Either way, the lender is going to get his. The student is going to get it also.

Risk, it should be carried EQUALLY. The student should repay his student loans at the appointed time and the lender should assume the risk of knowing the student could default on the loan. The federal government should do more to cover the cost of higher education as many other countries do. The primary reason our government doesn't is due to the fact that there is no guarantee that it will pay off for the government. We are a capitalistic society and money is the driving force for all that happens in this part of the world.

Students should be able to discharge their student loans in bankruptcy as they can other non secured dept. Everyone knows there is risk involved with student loans and everyone should play by the rules that any other entity  is forced to when it comes to loans. Sallie Mae is a company. A non government entity that is in the business of making money. The sooner people start realizing what is happening to the people of this country the sooner things may turn around.

 

Update anyone?

Submitted by Kay Jay (not verified) on January 4, 2008.

In 1996 when all my coworkers then 22-25 decided to all file bankruptcy on their student loans.  I berated them and told them I'd Never file for bankruptcy.  I was fresh out of college.  2008 and my student loan is now $79,000.  I don't make enough to pay the near $1,000 monthly payment.  I have called, written and pleaded with Panhandle Plains out of Amarillo Texas to let me pay what I can afford.  That's $280 per month.  They refuse to take the payment, won't consider my fiancial hardship, and they're rude everytime I call.  When I don't send money and just before the loan defaults, they call with a suggestion that I defer the payments.  I get a 6 month forebearance and the loan increases these days by about $15,000 every 6 months.  Until the laws changed I'm going back to school via the internet.  This will hold them off.  I wish someone would tell us who to write and I wish someone in our position would head up the effort to allow us to file bankruptcy on these students loans.  I got sick three years ago and had to file for bankruptcy.  I was in bad enough shape to file on my house I inherited, car, everything else, but the student loan just stayed.  It's just wrong because our parents can't afford to send us to Harvard, and we take a loan to go to JR. College, we're penalized.  The first time Panhandle Plains sent me notice that my loan was coming due, the monthly payment was $260.  I was making exactly $700 per year. My apartment was $400 and my car loan was $250, Insurance $70.  My parents were helping me out and I was trying to build a career with the degree I had.  Like another poster said, it's a gamble.  I gambled and lost.  My career NEVER took off.  I'm now working in another field and my income is climbing.  Too bad I didn't build a career early on in this field.  But why is it that we both gambled and the loan company ALWAYS wins.  They gambled on me, to make a career that could have yielded a million bucks.  It didn't yield that amount.  That's like going in on a fixer upper home with a friend and expecting the friend to pay you back your half regardless of whether the home is a good investment.

I am extremely depressed

Submitted by Claud (not verified) on January 19, 2008.

I graduated 9 years ago. My student loans that were with Sallie Mae now are at a collection agency and have way more than double. It is around $183,000. I am not kidding. I had filed bankrupcy twice due to my career not taking of. I never thought this could happen, I had a dream of having an education and to be successful. I never counted on my misfortunes. I married 7 years ago, I have two girls and I can not fully enjoy motherhood and fully embrace it because there is not even one day that goes by that I do not think of my student loans. I am extremely depress, I can't sleep at night...There was one men from Sallie Mae that told me that I should have thought twice before having children because I need to pay my loans first.....They suggested to go to William D. Ford Federal Direct Loan Program but I looked at the application and they want my husband to sign. He has no student loans, I had this loans way before I met him, we are having hard time to make ends meet. I am afraid that they would go after him. I really do not know what to do, If to talk to the collection agency and expalin to them that I have a 2 year old and no one to care for her but me. I can't work for now. Any one have any suggestions of what to do????? But even, if I could work, I could never make my monthly payment.....

Help?

Submitted by Melissa (not verified) on January 22, 2008.

Hello,

i have 2 student loans.  One with the Federal Govt and one with a private lender.  My bankruptcy was filed with the court on Nov. 21st and my meeting of the creditors was Jan 3rd.  After that my attorney said to wait for the letter to arrive and that he would contact me if anything popped up.

In December I recieved both loans via mail/email and I paid them before the due date.  Both were paid on 12.10.07. This month (Jan) I haven't recieved a bill from either of them?  Does anyone know why the communication stopped?  When I go to the website of the private loan it lists in the loan details as "verified bankruptcy".  Does anyone know what that means? 

To me if they want me to pay they will continue to mail me bills?  Am I correct in my thinking.  Even the website for the private lender shows amount due as zero.

I don't want to call them that is for sure.  Should I just ride it out??

Thanks for you help!

Sallie Mae Private Signature Loan

Submitted by Marie (not verified) on January 24, 2008.

I have a PRIVATE SIIGNATURE  Loan from Sallie Mae.  I filled for Bankruptcy before the new law went into effect October 2005.  I was discharged in February 2006.  Sallie Mae came to me immediately for payment in March.  I had a death in the family and had to go into forebearance.  Five months into the forebearance, I got a credit report.  All 3 reportiing agency is Reporting the SallieMae loan as included in Bankruptcy. I called them to inform them of this, they said I had to show them proof, so I sent the letter I got from the Bankruptcy Court that just stated my Bankruptcy is discharged with no additional notes.  I also sent them the schedule where I had included them in my bankruptcy.   I did not hear anything form them for about 3 months and now, they are starting to harass me.  Can someone please help me on this... Based on my understanding, the credit report gets all their information from your creditors, so if my student loan was not discharged, why is Sallie Mae as recently as December 21st, 2007 reporting the loan as a Discharged in Bankruptcy at the 3 agency.  PLEASE HELP ME!  I am really confused.

Marie

Bankruptcy protection struck down?

Submitted by Jeff Senter (not verified) on March 9, 2008.

Last October, another poster, Paul Hupp, said that he has challenged the protection of private loans in the Ninth Circuit court. Does anyone know the outcome of this case? I have checked the court's web-site but the only reference that can be found is who has the appropraite jurisdiction.

Bankruptcy protection struck down?No, Not yet....

Submitted by Alan Page-BK Lawyer (not verified) on March 15, 2008.

The constitutional legal challenges, mentioned above, to both federal and private student loans by a debtor is still being litigated and will not be finished for some time, at least 18 months. Maybe much longer. The case is several steps away from a final determination.

That case is currently seeking discretionary review before the 9th Circuit Court of Appeals. The people involved are fairly confident the private student loan exception to BK discharge will not hold up. The federal loans are another story-it is a wild card.

 

Denied bankruptcy for private Sallie Mae loan in 2004`.

Submitted by jmeridian (not verified) on March 21, 2008.

I am `trying to understand how it seems that some contributors to this post had private student loans discharged in 2004 and I was told by my attorney it was impossible. Can there be any retroactive relief?

 

JM

Private student loans were

Submitted by Alan Page-BK Lawyer (not verified) on March 24, 2008.

Private student loans were dischargable before the October 2005 BK revisions. If you filed BK before then your private SL could be discharged, but not after.

BK law is not retroactive.

Private Loans

Submitted by Elgis (not verified) on April 3, 2008.
I have called various lawyers regarding my private loans. A few lawyers have told me to come in but the majority told me to be careful with those who wanted me to go see them because these loans will not be discharged. Right now I am paying $400 a month. Since the loans are private they can not be in forbearance while I finish my masters. In Miami-Dade County there is a huge budget shortage. It is said that teachers will have to pay their own insurance and might not get our raises. I have no idea what to do. My husband and I car pool. We only have one car to try and save money. There is no way on earth we could afford another car or even a higher rent than the $800 that we pay...What should I do?

Massive debt

Submitted by Gigi (not verified) on April 10, 2008.
My husband and I have over $200,000 in private student loans and over $150,000 in federal student loans.  I am currently not working and my husband is a teacher.  When our loans enter repayment, the monthly payment will be about $3000!  My husband doesn't even make that much per month and my degree (HISTORY-Lib. Arts) will not land me a high-paying job.  We are going to have to get some of these loans discharged.  We are currently driving one car that is 13 years old and we have two children in elementary school.  HELP!  We are going to have to declare some sort of bankruptcy for the private loans at least.  We are not trying to get out of paying for our education but we will only be able to afford a couple hundred dollars a month, not $3000!  Is it really going to be over 18 months before any private loan BK is passed?

This is outrageous!

Submitted by JD (not verified) on April 28, 2008.
I borrowed $76,000 in private student loans and now that I have finally landed a good job I still cannot afford to pay them.  Now AES is telling me I owe them $102,000 after origination fees, accrued interest, etc.  That is $1,029 per month!  I can't afford it now, nor can I see myself trying to pay extra on the principal.  If I am forced to pay these loans for 30 years that will total $370,440!  I understand why certain things are non-dischargeable in bankruptcy, but I don't understand why these lenders are given special consideration.  This is so depressing.  I wanted an education, not a debt that would haunt me to the grave.

Disabled and Desperate

Submitted by Kristy (not verified) on May 7, 2008.

I too am falling victim to Sallie Mae's private loan nightmare. I took out my loans more two or more years ago. Part of that time I was working on my masters degree, but then put it on hold when I had my son in March of 2007. Since then I have been harassed, threatened, and basically called a liar and scam artist by Sallie Mae, when I was unable to start payment of the private loans. They want over $1000 a month and have now bullied me into putting my loans in forbearance twice, which they were kind enough to waive the $100 forbearance fee, but tacked on nearly $5000 each time for the forbearance itself. I am drowning in all this debt, I am disabled and my disability got worse after I gave birth and has been on a downward spiral ever since. I live on $600 a month from disability, so obviously I can not pay over $1000 a month to Sallie. When I tried to explain this to them and negotiate a lower payment they were rude and even went so far as to accuse me of getting pregnant so I could claim my disability had gotten worse so I could then use that as an excuse to not pay them. I know that sounds crazy but that's what one voice behind the phone told me.

I can't seem to find a lawyer to touch this case in BK court, although I have heard that these loans can be discharged in EXTREME cases. Well I am not sure what constitutes extreme, does anyone have any knowledge on this, I am terrified that these loans are going to ruin my life and I am dealing with depression as well as my physical disability. Any advice would be appreciated.

 

 

I have borrowed about

Submitted by Dave (not verified) on May 7, 2008.
I have borrowed about $50,000 in private loans. My estimated monthly payment for both loans is right around $800 and I earn around $1200 monthly. You guys do the math. I know i have a responsibilty, but all I wanted was an education, not a $375,000 debt that i'm gonna carry all the way to my grave. I haven't filled for bankruptcy yet, hoping there will be some changes to BK Law. At 18 I had no idea what i was doing to myself!!

Private Student Loans

Submitted by Anitra (not verified) on May 8, 2008.

I can relate to  a lot  of  the  blogs on here. I'm a single mother that is not  receiving  child support. I have $39.000 of  private loans and $17.000 in Federal loans. I'm in default  with my private student loan  based  on them not  working  out  a payment  plan with me . I  have  to  pay  $717 a month on my private  loans-- mind you  this  does not include my Federal  loans.  After taxes, I make  about $1700. This  makes me  hate  even going  to  school  and  receiving a education. I feel in certain circumstances America should allow  people to file for  and bankruptcy if it  will hurt taking  care of  any  dependents and everyday  living.

Not all "Private" loans were formerly dischargeable

Submitted by John (not verified) on May 10, 2008.
This causes a lot of confusion. In reality there were not many truly "private" loans made solely by for profit entities prior to the change in law in 2005. Prior to this, most private loans were originated by a for profit bank, but made under a program guaranteed by a "non-profit" agency. These types of loans, although they appear private on the surface, were not dischargeable even prior to the change in 2005. Of course, most of these "non-profit" entities, like TERI, are just front organizations for a big for profit operation that securitized the loans and made money. However, with the recent credit crunch TERI has had to file for Chpt. 11. We should watch the worsening economy to see how it affects the private student loan business as well as bankruptcy legislation.

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