Could Private Student Loan Borrowers Be Eligible for Bankruptcy?

One of the biggest issues that face millions of student loan borrowers is the idea that their student loans aren’t eligible for discharge through bankruptcy proceedings. 

Federal loans have long been difficult to discharge through bankruptcy, with borrowers required to show undue hardship to get rid of their student debt. However, since a law passed in 2005, private student loans have also been almost impossible to discharge through bankruptcy. 

However, it might not be as straightforward as borrowers being stuck with private student loans. The Student Borrower Protection Center (SBPC), a nonprofit advocacy organization, recently released a report alleging that millions of borrowers are eligible for billions of dollars in relief for their private student loans.

SBPC report: up to $50 billion in private student loans could be eligible for bankruptcy discharge 

So, what’s in this report? In a blog post describing the report’s findings, Ben Kaufman, a former student lending financial analyst with the Consumer Financial Protection Bureau, and Amber Saddler, a lawyer at the SBPC, allege that private student lenders have been lying about — and even collecting on — debts that should be dischargeable as part of bankruptcy proceedings.

The main issue, according to the SBPC, is that private student loan lenders have been labeling certain loans as education loans, even though they aren’t actually “qualified” education loans. Some of the allegations in the report include:

• Lenders use misleading language in contracts: They state that some loans may not be dischargeable, even though they are. Some courts, the report points out, have ruled that these loans are dischargeable and that using this language in contracts doesn’t negate the right to have the loans discharged as part of bankruptcy proceedings.
• Some lenders continue to collect when they shouldn’t: Even when loans are identified as dischargeable and included in a ruling, some lenders continued to collect from borrowers. They kept asking for money because borrowers didn’t realize their loans could be discharged.
• Lenders warned investors that some loans could be discharged in bankruptcy: Private student loan lenders knew borrowers could potentially discharge some of their loans, as the warnings were included in language aimed at investors.

The analysis put forth in the report claims that an amount of $50 billion represents potentially dischargeable loans held by 2.6 million borrowers who have no idea that they could be eligible for relief.

What types of private student loans are eligible for bankruptcy discharge?

At the heart of the claim by the SBPC is the idea that only “qualified” education loans can’t be discharged during bankruptcy proceedings. However, these lenders offer a number of products that are labeled as private student loans that don’t actually meet the definition of qualified, according to the SBPC.

For a student loan to actually be considered an education loan, it’s supposed to be given to an eligible student for use at an eligible school and eligible expenses. Some loans that might not pass this muster include:

• Careering training loans
• Bar exam study loans
• Direct to consumer loans
• Loans for for-profit schools and other unaccredited programs

The SBPC report points out that many of these loans should be eligible for bankruptcy, private lenders are aware that they should be dischargeable and that the lenders are using shady tactics and outright lying about it in order to keep borrowers in debt and paying.

The report cites language used in contracts, court rulings and investor relations communications to show that, perhaps, borrowers might be able to find relief by filing for bankruptcy and having some of their private student loan debt discharged.

Student debt relief

Recently, there have been efforts at student loan relief. The Biden Administration recently stepped-up efforts to forgive student loans used for for-profit colleges and colleges that made fraudulent claims about their programs. These efforts at student loan forgiveness have been useful for those saddled with crushing student loan debt for programs that haven’t panned out or that deceived students desperate to improve their situations.

Some private student loan borrowers are also receiving a degree of relief, thanks to a recent lawsuit settlement with Navient. In fact, 66,000 private student loan borrowers are receiving loan cancellation due to the settlement.

The latest settlement is only one in a string of lawsuits affecting the lender, which announced that it would stop servicing federal student loans in 2022.

Complaints against student loan servicers and lenders

The SBPC report doesn’t come as a surprise to many of those who watch the student loan industry. Federal student loan servicers and private student loan lenders have been embroiled in controversy for years. There are common complaints to the Consumer Financial Protection Bureau (CFPB) about:

• How borrowers are often steered toward costly forbearance plans instead of income-driven repayment
• The way student loan payments are incorrectly applied to their account, resulting in more paid interest
• Deceptive practices about income-driven repayment renewal and related deadlines

Even those who don’t have private student loans can end up with faulty information that causes harm to borrowers, rather than allowing them to get help. Federal loan servicers, including FedLoan, Nelnet and MOHELA, have been accused of deceptive practices in the past, and some of them, like Navient, also offer private student loans.

What’s next for the student loan system?

Reports like the one from the SBPC, as well as the ongoing complaints and lawsuits involving federal student loan servicers and private student loan lenders, highlight the problems we have in the system. Even if the Biden Administration does do more for student loan relief, including wider loan cancellation, there are still underlying issues that need to be addressed.

Private student loans are becoming an increasing issue, and if lenders are engaging in tactics similar to federal loan servicers, there could be another scandal brewing. 

If you’re struggling to navigate your student loans, consider getting help from an expert at Student Loan Planner, who can help you review your options, as well as help you learn how to talk to your federal loan servicer to get into an income-driven plan, or help you figure out what you need to do to get help with private student loans.