A new bill introduced in both the U.S. House of Representatives and Senate would make it easier for students to erase private student loan debt when they declare bankruptcy, if the bill is signed into law.
U.S. Reps. Danny Davis, D-Ill., and Steve Cohen, D-Tenn., co-sponsors of the bill, say the bill would help both the federal government and students save money.
""The student loans were 100 percent backed by [federal] government guarantees, so they were essentially no-risk loans,"" Ira Cohen, Davis' director of issues and communication, said. ""How did the banks justify the interest rates on loans that had no risk whatsoever attached to them?""
Cohen said because the federal government was already bearing the risk, the bill addresses this issue by transferring student loans directly to federal government control.
Susan Fischer, UW-Madison director of financial aid, said the university expects about 1,135 students to borrow about $13.5 million in private funds in the 2009-'10 academic year. Loans from the university are not included in this estimate.
She said because the private loans do not require the Free Application For Student Aid form, they are easier to obtain.
""People think, ‘How different can they be?' but they can be very different,"" she said. ""Some of those private loans are up to 20 percent interest.""
Under current law, even in cases of bankruptcy, private student loans are not forgiven unless the student can prove ""undue hardship."" Sallie Mae, one of the biggest private student loan providers, said on its website that under these circumstances, students must provide evidence that they are physically unable to work or without any chance of making money.
Sallie Mae said in a statement that the company supports bankruptcy reform that allows federal and private student loans to be discharged if the borrower made a ""good-faith"" effort to repay in a five- to seven-year period.
""I think students have no business borrowing a private student loan until they have accessed other federal money, because it is much better protection for the student and the family—it's less expensive,"" Fischer said.
Cohen said after years of work on this bill, Davis is ""guardedly optimistic"" that it will pass.
