CFPB: Bankruptcy Code Harms Student Borrowers

October 17, 2014 at 8:24 am Leave a comment

Is the Bankruptcy Code to blame for difficulties students experience modifying their private student loan obligations?  That is the implicit question posed by the CFPB in its annual report analyzing the student loan industry.  According to the report, which summarizes data from complaints received by the CFPB over the previous year, students seeking repayment options for private student loans are facing many of the same obstacles homeowners face after falling behind on their mortgages.

According to the report, since the Bureau began accepting private student loan complaints in 2012, the most common complaint comes from borrowers seeking to avoid default when they face financial hardship.  According to the Bureau, its findings suggest that lenders and servicers “have yet to address the need for loan workout in a fulsome manner.”

What would the CFPB do?  In 2005, one of the changes made to the bankruptcy code was to make private student loans non-dischargeable in bankruptcy.  At the time of this change, similar protections had already been granted to federally subsidized student loans.  The CFPB is recommending that Congress revisit the PSL exemption “to determine whether the special bankruptcy protection afforded to lenders should be limited to those who offer certain loan modification options.” Remember, the CFPB has already put in place a regulatory framework mandating that lenders work in good faith with homeowners who are struggling to make their mortgage payments.

The nation’s rising level of student loan debt is a serious and growing problem.  As I’ve pointed out in a previous blog, there is even growing evidence that student debt is holding back the housing recovery by making it more difficult for people to afford their first house.  What concerns me about the CFPB’s recommendation is that it adds fodder to an increasingly ideological and divisive debate about the root causes of student debt.

Let’s look at issues surrounding education finance.  But let’s not analyze the issue in isolation.  College tuition has skyrocketed and shows no signs of letting up.  Looking at the amount of debt being amassed in this country to get an education and focusing exclusively on lenders is tantamount to blaming the woes of the NY Jets on their quarterback, Geno Smith: it might be comforting, but there are some issues for which there are no easy solutions.

Well I’m off to enjoy my morning yogurt.  It’s going to taste extra good now that Governor Cuomo has signed legislation  naming it the official state snack.

Entry filed under: General, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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