For now at least, the Obama administration is declining to endorse legislation by Illinois Sen. Richard Durbin that would allow borrowers to discharge their private student loan debt in bankruptcy.During a congressional hearing on Wednesday, Treasury Secretary Timothy Geithner was non-committal about the legislation, while at the same time suggesting that he is broadly sympathetic with Durbin's concerns about the private student loan market.
"So we'd like to work with you on your specific proposal," Geithner told Durbin during a Senate appropriations subcommittee hearing. "But there's definitely some merit, and we want to do it carefully."
Later in the hearing, Geithner made clear that the Obama administration is keeping its options open with regard to Durbin's legislation, which would make it harder for banks to collect on delinquent student loans.
"That'd be one approach, and we'll look at all sensible ideas," Geithner said.
Durbin is hopeful that he can rally support for the measure at a time of rising concern about the soaring level of student debt. The Consumer Financial Protection Bureau announced last week that more than $1 trillion in student debt is currently outstanding, including more than $150 billion in private student loans.
Until 2005, only federal student loans were generally exempt from discharge in bankruptcy, but the law was changed that year to put private lenders on the same footing as the government.
The interest rate on federal student loans is scheduled to increase in July, and some in Congress want to take action to prevent the rate hike, which would offer Durbin an opportunity to try to push his bill through Congress.
Banks' role in student lending has been shrinking, but the proposed changes to bankruptcy law are still drawing opposition from industry groups, including the Consumer Bankers Association and the American Bankers Association.
Those groups argue that changing the bankruptcy rules would add risk to the lending business, restrict the availability of credit to college students, and allow students to walk away from their obligations immediately after college by filing for bankruptcy.
At Wednesday's hearing, Geithner echoed some of Durbin's concerns about the private student loan market. For example, he noted that federal student loans provide borrowers flexibility with regard to repayment, adding that: "In the private markets those protections do not exist."
But Geithner also noted that the CFPB has authority to look at private student lending, and he did not sound convinced of the need for congressional action.
Also during the hearing, Geithner maintained the administration's recent drumbeat of pressure on the Federal Housing Finance Agency (FHFA) to begin allowing principal reductions on some Fannie Mae and Freddie Mac mortgages.
"There's some cases where principal reduction is not just good for the homeowner, and not just good for the community, but it's good for the taxpayers, too," Geithner said. "It's not an overwhelming number. But where it makes sense we should do it."
Geithner said that the Treasury Department is trying to convince FHFA Director Edward DeMarco that its analysis is correct.
"Now, what Mr. DeMarco has said is that they are taking another look at their numbers, looking at our economic case," Geithner said, noting that the FHFA operates independently of the administration. "I hope he is going to be in a position to indicate what he plans to do in the next several weeks."
DeMarco has long opposed principal reductions for delinquent borrowers, arguing that they will not be the best way to minimize losses to taxpayers. He has also raised questions about whether his agency has the legal authority from Congress to do principal reductions.'
As his position has come under increasing fire from economists, the administration and Democratic lawmakers, DeMarco has added a new argument.
He told the Financial Times in a recent interview that principal reductions would amount to a bailout to the largest banks, because those banks hold a great deal of second-lien debt, and those second liens would become more valuable if first liens were reduced without a simultaneous reduction in second-lien debt.
Geithner said Wednesday that officials at Fannie and Freddie are more open to the idea of principal reductions than the FHFA has been.
"I think Fannie and Freddie themselves are actually pretty supportive of this. The FHFA has been a little more conservative," Geithner said. "But they're reasonable people."

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