Kildee bill seeks relief for private student loan borrowers

Melissa Nann Burke
The Detroit News

Washington — Legislation introduced Thursday by Michigan Democratic U.S. Rep. Dan Kildee would provide some relief to student borrowers with loans that are privately held. 

President Joe Biden recently extended through September the pause on federal student loan payments and interest, which was first put in place last year by Congress in response to the pandemic and then renewed by the Trump administration. 

But that break does not apply to student borrowers with privately held loans. Kildee of Flint Township is hoping his bill would provide some relief to millions of borrowers who are not eligible for the federal "pause."

Some lenders advertise their products as a way to pay for college, but these aren't technically student loans. For unsuspecting students, that could lead to unnecessarily high costs and a lack of consumer protection.

"The fix that we're proposing is intended to deal with a specific set of circumstances," Kildee said. "It doesn't mean that this is the whole picture, but sometimes these smaller issues just get lost in the shuffle."

His bill, introduced with six other Democratic co-sponsors, focuses on where the lawmakers have detected inequities in the system through conversations with student borrowers and constituents, Kildee said. 

The bill would allow student borrowers to discharge both privately held and federally backed education loans in bankruptcy under court supervision — something that is difficult do now, even though other forms of debt may be discharged in bankruptcy. 

The legislation would also amend the Truth In Lending Act to require private student loan lenders to discharge a loan if a student suffers a total and permanent disability, Kildee said. 

Finally, the measure would prohibit private lenders from accelerating repayment of a student loan in cases when a co-signer becomes disabled or files for bankruptcy, Kildee said. This process is known as auto-defaulting. 

U.S. Rep. Dan Kildee

He said that lenders likely argue that in these cases, the security on the loan has been compromised because the cosigner is not as capable as they once were to make good on the loan.

"We get that, but if the person is continuing to be current with their regular payments, as the principal borrower, they should be allowed to continue to pay that student debt, just as they have been, and not be penalized because a parent or grandparent has become disabled, for example," Kildee said. 

He plans to announce the legislation at a Friday meeting of the Michigan Association on Higher Education and Disability, his office said. 

He expects there to be some push back from private lenders "because they like things the way they are." 

Student debt has exploded in recent years, but critics of reform legislation aimed at private lenders note that only 8% of the $1.7 trillion in outstanding U.S. student debt last year was in the form of privately held loans. The bulk of loans are from the federal government.

The Consumer Bankers Association, which represents retail bankers, said two provisions of Kildee's bill — requiring the discharge a loan when a student is permanent disabled and prohibiting auto-defaulting — are not needed because that is already the practice of its lenders. 

"Our banks don’t do that," said lobbyist Tim Carey, the association's vice president for congressional affairs. "Our position is that it’s unnecessary." 

In terms of borrowers discharging student loans in bankruptcy, Carey noted that bankruptcy judges may approve the discharge of student debt on a case by case basis if the student can show undue hardship. 

"These type of bills generally remove that undue hardship test," Carey said. 

He suggested that would help very few borrowers with bank-issued loans because 96% of private borrowers are making their payments and in good standing, while most of the defaults happen to borrowers with federally backed loans for a number of reasons, including overborrowing.

Carey added that there's an cost component to making these loans more easily dischargeable in bankruptcy that would likely result in making the loans more expensive for future borrowers. That is, because these are unsecured loans, Carey said.

"These loans are to young people who generally have unestablished credit, and the bankruptcy provision — the extra undue hardship provision — give banks the ability to price the risk in a such a way to make the loan more affordable," Carey said. "So, there's a give and take."

Kildee's bill, called the Lenders Offer Assistance Now (LOAN) Act, has the backing of several higher education groups, including the American Association of Community Colleges, the Association of American Colleges & Universities, the Association of Community College Trusties and the Association on Higher Education and Disability. 

The original co-sponsors on the bill are Reps. Andre Carson of Indiana, Steve Cohen of Tennessee, Madeleine Dean of Pennsylvania, Ed Perlmutter of Colorado, Juan Vargas of California and Eleanor Holmes Norton of the District of Columbia.