The New York Times recently published an illuminating story on the difficulty of discharging student loan debt in bankruptcy court. Incidentally, the story coincides with a Public Citizen report issued last month on consumers’ access to justice in the student loan industry. The report, Between a Rock and a Hard Place, Courthouse Doors Shut for Aggrieved Private Student Loan Borrowers, provides an overview of the student loan market, and discusses the two obstacles that obstruct student loan borrowers’ ability to seek to hold lenders accountable for misconduct. Here is the report introduction:
Until recently, there was little scrutiny of the private student loan market. Little was known about market participants and their practices, and the resulting impacts on borrowers and the overall economy. Much like the rest of the financial system, this largely unregulated and opaque market has allowed powerful financial institutions to reap enormous benefits at consumers’ expense.
Additionally, in the student loan market, for-profit colleges have taken advantage of vulnerable student borrowers. Charging high interest rates and penalties in alleged violation of state consumer protection laws, providing high-cost loans to borrowers who will likely be unable to repay their debts, and misrepresenting the quality of educations that they finance are just a few of the predatory practices of which private lenders and for-profit colleges have recently been accused.
The Consumer Financial Protection Bureau (CPFB or Bureau) recently released a report on the private student loan market, which was preceded by a request for information regarding private education loans and lenders. Thousands of borrowers responded to the request, detailing a variety of grievances with their private student loan experiences.
Borrowers’ troubles are magnified by their lack of access to justice. Private student loan borrowers are often unable to seek redress for harms suffered at the hands of private lenders, loan servicers and other industry players, because contracts governing their loans dictate pre-dispute binding (or forced) arbitration. The terms require borrowers to resolve disputes with their lenders in private arbitration proceedings.
In April 2012, the Bureau launched a study on forced arbitration in contracts for consumer financial products and services as it is required to do under the Dodd-Frank Act. Following completion of the study, the Bureau can and should eliminate forced arbitration in private student loan contracts, because the lack of accountability resulting from these contract terms harms the consumer financial market and the public interest. Financially distressed borrowers are also blocked from obtaining relief in bankruptcy proceedings. Until 2005, financially burdened borrowers of private student loans had an adequate mechanism to discharge (or cancel) their private student loan debt.
But post-2005, students in deep financial despair who turn to the bankruptcy system for assistance are severely disadvantaged because their student loan debt cannot be extinguished unless they can demonstrate that their financial condition meets an arbitrary and undefined “undue hardship” standard. The result is that borrowers of private student loans lack a meaningful opportunity to seek relief in bankruptcy court. Congress must pass a law that would return the system to the pre-2005 bankruptcy treatment of private student loans.
Student borrowers’ predicaments with predatory student lending practices and deficient legal remedies necessitate action from both the Bureau and Congress. These changes will strengthen the rights of consumers with private student loans and restore their access to justice.