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02.10.22

Letter follows report finding private student loan companies intentionally misrepresented student rights

WASHINGTON — U.S. Senate Majority Whip Dick Durbin (D-IL) and U.S. Senator Sherrod Brown (D-OH) today led six colleagues to write a letter to the Consumer Financial Protection Bureau (CFPB) expressing their concerns, first raised in a Student Borrower Protection Center (SBPC) report, that private student loan companies and managers intentionally misrepresent borrowers from the possibility of repaying “unqualified” private student loans by bankruptcy case. Federal law prevents “qualified” student loans—those federal and private loans used to fund education at an institution of higher education eligible for federal student aid—from being discharged in the event of bankruptcy, except in of “undue hardship”. Unqualified private loans can be discharged without bearing the burden of undue hardship. The SBPC estimates that about $50 billion in unqualified private student loans held by 2.6 million borrowers could be eligible for bankruptcy discharge.

“These private unqualified loans, created by lenders to generate additional revenue, include direct-to-consumer loans and vocational training loans used for unaccredited schools that are ineligible for federal student aid. These schools, many of which are for-profit colleges, often provide insufficient educational benefits and leave students with little but massive student debt,” wrote the senators. “SBPC found that private student lenders were taking advantage of the widespread belief that all private student loans are non-dischargeable in bankruptcy and that lenders were marketing their non-qualified student loans under this false pretense… At the same time, when these companies sold ineligible debt to Wall Street investors, they explicitly disclosed that ineligible student loans were eligible for bankruptcy discharge – telling the truth to investors while lying to borrowers.

“There is a growing bipartisan consensus in Congress that student loan bankruptcy laws should be overhauled to make them fairer and more convenient for borrowers who have no other options for relief. But, as we continue to work on lasting changes to these laws, we must not allow businesses to fraudulently prevent borrowers from seeking what little relief the current law provides. We urge the CFPB to review the troubling findings of the SBPC report and take appropriate action,” concluded the senators.

US Senators Sherrod Brown (D-OH), Sheldon Whitehouse (D-RI), Elizabeth Warren (D-MA), Maggie Hassan (D-NH), Alex Padilla (D-CA), Jack Reed also signed the letter . (D-RI), Mazie Hirono (D-HI) and Tina Smith (D-MN).

Last August, Durbin introduced the bipartisan NEW BEGINNING through the Bankruptcy Act to restore the ability of distressed borrowers to seek bankruptcy discharge for federal student loans after a ten-year waiting period.

Find a copy of the letter here and below:

February 10, 2022

Dear Director Chopra:

We are writing to urge you to promptly investigate the findings of a troubling report released by the Student Borrower Protection Center (SBPC) which found that private student loan companies and managers intentionally misrepresented borrowers from the possibility of discharging certain private student loans in the event of bankruptcy.[1] We urge the Consumer Financial Protection Bureau (CFPB) to investigate these findings and take appropriate action to ensure that private student lenders and servicers comply with bankruptcy law.

According to the SBPC, for decades private student lenders have intentionally perpetuated the false narrative that all student loans, including all private student loans, are non-dischargeable in bankruptcy except where borrowers meet a standard of “undue hardship”.[2] In reality, these private student loan release rules only apply to qualified student loans. Qualified Education Loans are defined in the Internal Revenue Code as loans taken out by an “eligible student” used to fund the cost of attending a recognized institution of higher education eligible for federal student aid.[3]

However, the SBPC report indicates that private student lenders have long sold a variety of private student loans that do not meet the definition of qualified student loans and are, therefore, generally dischargeable in bankruptcy. The SBPC estimates that about $50 billion in private student loans held by some 2.6 million borrowers fall into this category. These private unqualified loans, created by lenders to generate additional revenue, include direct-to-consumer loans and vocational training loans used for unaccredited schools that are ineligible for federal student aid. These schools, many of which are for-profit colleges, often provide insufficient educational benefits and leave students with little but massive student debt.

The SBPC found that private student lenders were taking advantage of the widely held belief that all private student loans are non-dischargeable in bankruptcy and that lenders were marketing their non-qualified student loans under this false pretense. The report found that lenders included misleading language in their promissory notes, falsely telling students that they could not repay their loans in the event of bankruptcy. At the same time, when these companies sold ineligible debt to Wall Street investors, they explicitly disclosed that ineligible student loans were eligible for bankruptcy discharge – telling investors the truth by lying to borrowers.

Additionally, the SBPC report shows the extent to which lenders went to collect debts that could have been legally discharged, relying on the complexity of the bankruptcy process and abusive collection tactics, such as letters, phone calls and negative credit reports. offices. In some cases, lenders have taken legal action to recover debts that had already been legally discharged. The SBPC report estimates that private student loan companies raised hundreds of millions of dollars in loans this way.

There is a growing bipartisan consensus in Congress that student loan bankruptcy laws should be overhauled to make them fairer and more convenient for borrowers who have no other options for relief. But, as we continue to work on lasting changes to these laws, we must not allow businesses to fraudulently prevent borrowers from seeking what little relief the current law provides. We urge the CFPB to review the troubling findings of the SBPC report and take appropriate action.

Thanks for your consideration. We look forward to your prompt response.

Truly,

-30-



[2] 11 USC § 523(a)(8)



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