CBA urges caution on student loan bankruptcy reform

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The Consumer Bankers Association (CBA) cautioned members of the U.S. Senate not to change bankruptcy treatment for student loans.

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In a letter to the leaders of the Senate Judiciary Committee, CBA President and CEO Richard Hunt said proposed changes that would treat privately issued student loan debt the same as other types of private debt in bankruptcy court fail to address the root cause of the student lending crisis in America — unrestrained federal lending without clear disclosures or consideration for a borrower’s ability to repay.

Hunt pointed out that the federal government dominates the student loan market, with 92 percent of the $1.73 trillion in outstanding student debt stemming from U.S. Department of Education loans. Hunt said there is a stark contrast in outcomes between these loans and the remaining eight percent of private loans extended by banks.

“Publicly available data shows that most private student loan borrowers are successfully keeping up with their payments with less than 2 percent of loans defaulting annually and a significant majority of borrowers are already back to making regular payments following the initial impact of the COVID-19 pandemic,” Hunt wrote to committee leaders. “Borrowers must demonstrate ‘undue hardship’ to themselves and their dependents for a court to discharge student loan debt. The Courts have a well-established and respected precedent for how borrowers must demonstrate this hardship, and current bankruptcy reform efforts could negatively impact the current process of forgiveness available to borrowers.”

Further, these proposed changes would increase costs for new borrowers without addressing the question of college affordability and the role federal lending plays in fueling higher education costs, Hunt added.

“While changing the bankruptcy treatment for student loans may provide relief to a small number of borrowers currently in repayment, it would increase the cost of credit for new borrowers. Changing bankruptcy rules just for private loans would not address the root cause of the student debt crisis, which is overwhelmingly driven by federal lending. […] Any changes to current law must be equally cautious, comprehensive, and bipartisan,” Hunt wrote.

CBA has long been a leading advocate for higher education lending reforms to address the root causes of rising student debt and higher education costs. In April, CBA expressed support for the bipartisan Student Loan Disclosure Modernization Act, which would help streamline disclosure requirements and clearly explain the costs and terms of the federal student loan specific to the individual borrower.

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