The Senate’s latest banking bill primarily focuses on overturning large chunks of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Somewhat unexpectedly, on March 8, the Senate’s Banking, Housing, and Urban Affairs Committee approved the addition of two bipartisan proposals that provide help to some of the nation’s forty-four million student loan borrowers to this larger package. Mirroring legislation previously introduced by Senators Gary Peters (D-Mich.) and Shelley M. Capito (R-W.Va.) (and once more sponsored by these two congresspersons), these proposals would adjust how private student loan lenders treat a co-signer’s death or bankruptcy and how they report defaults to the big three credit bureaus. Due to the support of senators from both sides of the aisle, one observer reckoned that “this legislation is probably going to move.” In fact, the two proposals, as incorporated into the Senate’s banking bill, now head for consideration by the entire Senate.
The first proposal bars a lender from declaring a default or accelerating a private education loan when a co-signer dies or declares bankruptcy and obligates a private lender to release the co-signer from a student loan debt, if any remained, upon a student’s death. Per the second proposal, if a financial institution offers a loan rehabilitation program in which a borrower demonstrates the ability to make timely monthly payments and the ability to repay the relevant loan, the borrower may compel the lender to remove any default from their credit report. In a notable constriction, a borrower would only be able to use this option once per loan. As to the latter, one observer, Betsy Mayotte, founder and president of the Institute of Student Loan Advisors, commented: “From a fairness perspective, it makes sense to make this no longer an option for future private student loans.” In defending these bills, Sen. Peters observed that “[d]efaulting on a private student loan can have long-term economic effects, making it harder for a borrower to find a job, rent an apartment, or buy a car.” Sen. Capito added, “It is essential students are able to recover from defaulted student loans without permanently harming their financial future.” If left untouched, both changes would only apply to private student loans (“PSLs”) or agreements struck at least 180 days after the bill’s passage.
Both of these proposals would award borrowers of PSLs with greater protections than they currently enjoy as a matter of law. Yet, even if Congress enacts these changes, federal student loans, defined as those educational loans for which the federal government serves as the sole lender rather than merely the guarantor, would still boast more mitigatory features and allow for more flexibility than most PSLs. Although 90% of higher education loans are public and therefore eligible for loan rehabilitation, this private market remains substantial, currently totaling $9.9 billion and encompassing more 850,000 defaulted loans.