Senator Richard Durbin (D-IL) reintroduced legislation in Congress to allow privately-issued student loans to be discharged in bankruptcy.
This could negatively impact both the number of active private student loan lenders and the performance of student loan ABS. “The ability to discharge private student loans in bankruptcy would disrupt the private student loan market and could force lenders to raise borrower rates or elevate already strict underwriting standards, limiting access and valuable funding opportunities for students,” said the Education Finance Council in a press release today.
The 2013 bill is the third version of the so-called “Durbin Act” since 2010. The bill seeks to restore bankruptcy law to the language that was in place before 20015 and would remove “undue hardship” standard and allow private loans to be discharged in bankruptcy.
In 1998, Congress enacted legislation that prohibits borrowers from discharging federal student loans in bankruptcy unless they could prove "undue hardship." In 2005, it extended the standard to private student loans.
Part of the reason for making private student loans hard to discharge in a bankruptcy is that they are unsecured credits. Lenders have no recourse to an actual asset, so if a student defaults, there is nothing to repossess.
Deutsche Bank analysts said in a Feb. 6, report that it is unlikely any legislation will pass in the first half of 2013, as Congress grapples with the debt ceiling. However, increased concerns over student debt levels could bring more support for this legislation.
The student loan 90+ day delinquency rate was 15.1% for 2010-2012 vintage loans, compared to 12.4% for the 2005-2007 vintages, according to a FICO study. The average student debt was $27,253 in 2012, up from $17,233 in 2005.
But the EFC believes that the Durbin legislation “fails to fix the problem of excessive student debt.” “Excessive student debt stems from over-borrowing and skyrocketing tuitions,” said the EFC. “The key to effectively managing student debt is understanding the appropriate, responsible amount to borrow and the best available repayment option, each different with each individual borrower’s situation.”