.

SmartMoney Blogs

Real-Time Advice
Our real-time advice on how market shifts and news impact you and your money

Banks’ Secret Weapon in Student Loan Fight: Mom

One solution lawmakers put forward in the growing debate over student loans is to forgive the debt of some borrowers who file and get approved for bankruptcy. But experts say even if Congress passes such legislation, banks have already taken the measures to ensure it won’t work.

Getty Images

Two bills introduced last year — the Fairness for Struggling Students Act and the Private Student Loan Bankruptcy Fairness Act of 2011 — are suddenly in the center of a national debate over Americans’ skyrocketing student-loan debt. Both bills would give borrowers who have bankruptcy courts forgive their debts a way out of the private, but not Federal, college loans that they’re unable to repay. Unlike most consumer debt, including credit cards, car loan and mortgages, student loans currently cannot be wiped out after bankruptcy. Those whose debts are dismissed in bankruptcy today are still on the hook for their student loan payments.

While the legislation is aimed at helping thousands of borrowers struggling with debt, some experts say banks seem to have prepared for this possibility. Since they now require cosigners on most of the loans, both the borrower — and in many cases his or her parents – would need court-approved bankruptcies in order to wiggle free of the debt. And the law could have broader consequences, experts say, such as more stringent requirements to qualify for student loans, and slightly higher rates.

More than 90% of college loans private lenders have doled out since the credit crunch have co-signers, says Mark Kantrowitz, publisher of FinAid.org, which tracks financial aid and student loans. That’s up from roughly 50% prior to 2008. The chances both the borrower and co-signers would obtain bankruptcy discharges together are slim, he says. Since the recession, lenders have been thoroughly vetting co-signers to make sure they have top credit scores, pristine credit histories, and low debt compared to their income, say experts, and in many cases those co-signers end up being the students’ parents.

Of course, a new law could help those students who signed up for a private loan when lending requirements were loose. Chances are many of them didn’t have a co-signer or a co-signer could have been a friend whose own credit may be in the dumps now. It’s also unclear whether either of these bills will make headway. At least six bills have been introduced since 2006 to make student loans dischargeable and none of them have come to fruition.

But should the law be passed, students seeking loans in the future could find financing even harder to get than it is now. A report by the Consumer Bankers Association, which represents student loan lenders, states that pending legislation “could discourage lenders from offering private student loans or result in an increase in pricing (e.g. interest rates) to reflect additional risk.” For students, options for private loans have been shrinking for some time: There are now 22 lenders providing private student loans, down from about 60 before the market crash, according to FinAid.org. Last month, US Bank became the latest lender to exit the market.

It’s unclear how much rates on private loans could rise. Kantrowitz says the increase would likely be small, and might impact the upfront fees students pay on these loans rather than the rate.

For their part, private lenders say they represent a small part of the student loan market. Less than 7% of the student loans projected to be made during the current academic year — roughly $7 to $8 billion — are private student loans, according to the CBA. (The CBA didn’t return calls for comment.) Meanwhile, 93% or $111 billion are projected to be federal student loans. Separately, about 84% of outstanding student debt consists of federal student loans.

Like private loans, federal loans aren’t dischargeable in bankruptcy. Neither of the bills call for federal loans to be discharged. Consumer advocates say it’s because taxpayers would ultimately be on the hook to pay for those losses.

When borrowers default on private loans, private lenders can garnish their wages (with court approval) and can go after some assets like cash in a bank account. But with federal loans, borrowers who’ve defaulted could risk losing even more: In addition to garnishing wages, the government can keep their federal and state income tax refunds, intercept future lottery winnings, and withhold part of their Social Security payments.

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 36)

View all Comments »
    • By WebOsPublisher

      Verbinde Dich sofort mit den Dingen,die fГјr Dich am wichtigsten sind. Folge Freunden,Experten,Lieblingsstars und aktuellen Nachrichten.
      Twitter / seattlearea: ICO fines Midlothian Council …
      Suchanfrage
      Suche
      @
      Sprache:
      Deutsch
      Bahasa Indonesia
      Bahasa Melayu
      Dansk
      English
      EspaГ±ol
      Euskara
      Filipino
      Italiano
      Magyar
      Nederlands
      Norsk
      Polski
      PortuguГЄs
      Suomi
      Svenska
      Türkçe
      catalГ 
      français
      ДЊeЕЎtina
      О•О»О»О·ОЅО№ОєО¬
      Р СѓСЃСЃРєРёР№
      Українська мова
      ЧўЦґЧ‘Ц°ЧЁЦґЧ™ЧЄ
      Ш§Ш±ШЇЩ€
      Ш§Щ„Ш№Ш±ШЁЩЉШ©
      ЩЃШ§Ш±ШіЫЊ
      हिन्दी
      ภาษาไทย
      ж—Ґжњ¬иЄћ
      з®ЂдЅ“дё­ж–‡
      з№Ѓй«”дё­ж–‡
      н•њкµ­м–ґ
      Hast Du einen Account? Anmelden
      Neu bei Twitter? Registriere Dich noch heute! »
      Benutzername oder E-Mail
      Passwort
      Angemeldet bleiben
      Anmelden
      Passwort vergessen?
      Benutzt Du Twitter bereits via SMS?
      a,
      .btn-link,
      .btn-link:focus,
      .pretty-link b,
      .pretty-link:hover s,
      .pretty-link:hover b,
      .pretty-link:focus s,
      .pretty-link:focus b,
      /* Account Group */
      .metadata a:hover,
      .metadata a:focus,
      .account-group:hover .fullname,
      .account-group:focus .fullname,
      .account-summary:focus .fullname,
      .stats a:hover,
      .stats a:hover strong,
      .stats a:focus,
      .stats a:focus strong,
      .profile-modal-header .fullname a:hover,
      .profile-modal-header .username a:hover,
      .profile-modal-header .fullname a:focus,
      .profile-modal-header .username a:focus,
      .story-article:hover .metadata,
      .story-article .metadata a:focus,
      .find-friends-sources li:hover .source,
      .stream-item a:hover .fullname,
      .stream-item a:focus .fullname,
      .stream-item .view-all-supplements:hover,
      .stream-item .view-all-supplements:focus,
      .tweet .time a:hover,
      .tweet .time a:focus,
      .tweet-actions a,
      .tweet .details.with-icn b,
      .stream-item:hover .original-tweet .expand-action-wrapper,
      .stream-item .original-tweet a:focus .expand-action-wrapper,
      .opened-tweet.original-tweet .expand-action-wrapper,
      .stream-item:hover .original-tweet .details b,
      .stream-item .original-tweet .details:focus b,
      .stream-item.open .original-tweet .details b,
      .simple-tweet:hover .details b,
      .simple-tweet .details:focus b,
      .simple-tweet.open .details b,
      .simple-tweet:hover .details .expand-action-wrapper,
      .simple-tweet .details:focus .expand-action-wrapper,
      .simple-tweet.open .details .collapse-action-wrapper,
      .simple-tweet:hover .details .simple-details-link,
      .simple-tweet .details:focus .simple-details-link,
      .client-and-actions a:hover,
      .client-and-actions a:focus,
      .dismiss-promoted:hover b,
      .tweet .context .pretty-link:hover s,
      .tweet .context .pretty-link:hover b,
      .tweet .context .pretty-link:focus s,
      .tweet .context .pretty-link:focus b,
      .list .username a:hover,
      .list .username a:focus,
      .list-membership-container .create-a-list,
      .list-membership-container .create-a-list:hover,
      .story-header:hover .view-tweets,
      .card .list-details a:hover,
      .card .list-details a:focus,
      .card .card-body:hover .attribution,
      .card .card-body .attribution:focus,
      .events-card .card-body:hover .attribution,
      .events-card .card-body .attribution:focus,
      .new-tweets-bar,
      .onebox .soccer ul.ticker a:hover,
      .onebox .soccer ul.ticker a:focus,
      .discover-item-actions a,
      .remove-background-btn,
      .stream-item-activity-me .latest-tweet .tweet-row a:hover,
      .stream-item-activity-me .latest-tweet .tweet-row a:focus
      color: #0084B4;

      s,
      .pretty-link:hover s,
      .pretty-link:focus s,
      .stream-item-activity-me .latest-tweet .tweet-row a:hover s,
      .stream-item-activity-me .latest-tweet .tweet-row a:focus s
      color: #66B5D2;

      .tweet .sm-reply,
      .tweet .sm-rt,
      .tweet .sm-fav,
      .tweet .sm-image,
      .tweet .sm-video,
      .tweet .sm-audio,
      .tweet .sm-geo,
      .tweet .sm-in,
      .tweet .sm-trash,
      .tweet .sm-more,
      .tweet .sm-page,
      .tweet .sm-embed,
      .tweet .sm-summary,
      .tweet .sm-chat,
      .timelines-navigation .active .profile-nav-icon,
      .timelines-navigation .profile-nav-icon:hover,
      .timelines-navigation .profile-nav-link:focus .profile-nav-icon,
      .sm-top-tweet,
      .metadata a.tweet-geo-text:hover .sm-geo,
      .discover-item .js-action-card-search:hover .sm-search,
      .discover-item .js-action-card-search:focus .sm-search
      background-color: #0084B4;

      .wrapper.black
      background: url(a0.twimg.com/a/1354824529/t1/img/wash-black-30.png);

      .wrapper.white
      background: url(a0.twimg.com/a/1354824529/t1/img/wash-white-30.png);

      body
      background-position: left 40px;
      background-attachment: fixed;
      background-repeat: repeat;
      background-repeat: no-repeat;
      background-color: #C0DEED;

      body.user-style-seattlearea
      background-image: url(a0.twimg.com/images/themes/theme1/bg.png);

      SchlieГџen
      Diesen Tweet integrieren
      FГјge diesen Tweet zu Deiner Website hinzu, indem Du den untenstehenden Code einfГјgst. Erfahre mehr
      HTML
      Kurzwahl
      Link
      Hmm, es gab ein Problem beim Erreichen des Servers. Erneut versuchen?
      Anpassung
      Keine
      Links
      Rechts
      Center
      Stelle die Position und die TexthГјlle auf der Seite ein.
      Folgen
      Folge ich!
      Entfolgen
      Geblockt
      Entblocken
      Ausstehend
      Abbrechen
      Seattle Area
      ‏@seattlearea
      30 Jan
      ICO fines Midlothian Council ВЈ140K for data breaches (Computer Weekly): Share With Friends: | | Business – Law… feedzil.la/yOlToY
      Antworten
      RetweetetRetweeten
      Löschen
      FavorisiertFavorisieren
      3:48 AM – 30 Jan 12
      · Diesen Tweet integrieren
      30 Jan
      Seattle Area
      ‏@seattlearea
      ICO fines Midlothian Council ВЈ140K for data breaches (Computer Weekly): Share With Friends: | | Business – Law… feedzil.la/yOlToY
      Г–ffnen
      SchlieГџen
      Antworten
      RetweetetRetweeten
      Löschen
      FavorisiertFavorisieren
      Verpasse keine Updates von Seattle Area Trete Twitter noch heute bei und folge Deinen Interessen!
      Vollständiger Name
      E-Mail
      Passwort
      Sende eine SMS mit Folgen seattlearea an die Kurzwahl Deines Mobilfunkanbieters
      © 2012 Twitter
      Гњber uns
      Hilfe
      SchlieГџen
      Dieses Medium melden
      Dies wurde bereits als fragwГјrdiger Inhalt markiert.
      Ändere meine Einstellungen um mich zu warnen bevor Medien angezeigt werden die fragwürdigen Inhalt enthalten könnten.
      Aufgrund unzulässigen Inhaltes melden.
      Senden
      Abbrechen
      Erfahre mehr Гјber das Melden von Medien
      ×
      SchlieГџen
      Vollständiges Profil ansehen
      @
      SchlieГџen
      Retweet an Deine Follower senden?
      Abbrechen
      Retweeten
      SchlieГџen
      Bist Du sicher, dass Du diesen Tweet löschen möchtest?
      Abbrechen
      Löschen
      SchlieГџen
      TastaturkГјrzel
      Enter
      Details zu diesem Tweet
      G F
      Gehe zu Benutzer…
      ?
      Dieses MenГј
      J
      Nächster Tweet
      K
      Vorheriger Tweet
      Space
      Zum Seitenende
      /
      Suche
      .
      Neue Tweets laden
      FГјge einen Standort zu Deinen Tweets hinzu
      Twitter speichert Deine Standortangaben
      Du kannst die Standortangabe vor jedem Tweet ein- oder ausschalten, und Du hast jederzeit die Möglichkeit, Standortangaben nachträglich zu löschen.
      Erfahre mehr
      Standortangabe einschalten
      Nicht jetzt
      Standort ausschalten
      SchlieГџen
      Kurzprofil
      SchlieГџen
      Deine Listen
      SchlieГџen
      Neue Liste erstellen
      Name der Liste
      Link zur Liste
      Beschreibung
      Weniger als 100 Zeichen, optional
      Liste: Privatsphäre
      Г–ffentlich · Jeder kann dieser Liste folgen
      Privat · Nur Du hast Zugriff auf diese Liste
      Liste speichern
      SchlieГџen
      SchlieГџen
      SchlieГџen
      Registriere Dich bei Twitter $ folge @seattlearea
      Bei Twitter anmelden
      Vollständiger Name
      E-Mail
      Passwort
      Benutzername oder E-Mail
      Forgot your username?
      Passwort
      Du hast Dein Passwort vergessen?
      Anmelden
      Angemeldet bleiben
      Passwort vergessen?
      Benutzt Du Twitter bereits via SMS?
      Noch nicht bei Twitter? Melde Dich an, wirf einen Blick auf Dinge, die Dich interessieren und bleibe stets auf dem Laufenden.
      Registriere Dich »
      SchlieГџen
      Zweiwege-Kurz-Codes (zum Senden und Empfangen)
      Land
      Code
      FГјr Kunden von
      Vereinigte Staaten
      40404
      (beliebig)
      Kanada
      21212
      (beliebig)
      Vereinigtes Königreich
      86444
      Vodafone, Orange, 3, O2
      Brasilien
      40404
      Nextel, TIM
      Haiti
      40404
      Digicel, Voila
      Irland
      51210
      Vodafone, O2
      Indien
      53000
      Bharti Airtel, Videocon, Reliance
      Indonesien
      89887
      AXIS, 3, Telkomsel, Indosat, XL Axiata
      Italien
      4880804
      Wind
      3424486444
      Vodafone
      » Zeige SMS-Kurzwahlen fГјr andere LГ¤nder

    • It would be better if private loans offered offered some income based repayments. Especially considering the co signers who got stuck paying for other people’s loans while paying their own on a public school teacher’s salary.

    • @Graywolf
      I’d gladly goto a Co-Ed debtor’s prison than being a slave to a student loan that will never go away. At least I won’t have to worry about having a place to say and food. Where as now I’m starving and almost homeless because of these loans. Its not so much about what you went to college for either. So many law graduates are coming out of school with huge debt and no jobs. Law used to be a very prestigious profession. Now its a student loan mill tragedy.

    • @Wm
      Did you read the article? They are not talking about bankrupting federal student loans. They are talking about private, which wont affect your precious “tax dollars.”

    • @Professor:
      Please let us know where you teach so that we don’t send our posterity to learn anything from such a foul-mouthed, ill-tempered individual like yourself.

About Real-Time Advice

  • How breaking news — in the markets, Washington, and around the world — affects you and your money. Have a question about how current events may change your financial future? Email us at ask@smartmoney.com.

.