Private student loans may now be subject to bankruptcy filings
A private student loan is, for many low-income students, a way to pay for college. Operated outside the federal student loan system, these private student loans are very easy to get but can be difficult to pay back. New legislation in Congress may make these private loans subject to bankruptcy protections. The real solution, though, might be a readjustment of the value of education.
The business of private student loans
Private student loans are a secondary way that many students borrow money. When figuring out how to pay for college, many students end up turning to loans. The first “line of loans” are the federally supported and now federally administered loans. The limit on these loans, however, often falls far below the cost of education. In order to make up the difference, up to 45 percent of students and parents take out private student loans. These private student loans are basically loans with no credit check – and students are taking them out at higher rates than ever before. These loans often have variable interest rates and are offered with very little, if any, consideration of the student’s ability to repay the loan.
The problem with private student loans
Private student loans provide financing to students for college expenses. Many private student loans are taken out by students attending for-profit colleges or ultra-expensive “top tier” private colleges. Unlike a casino loan, payday loan, credit card bill or even some mortgages, private student loans cannot be settled during bankruptcy proceedings. Instead, since 2005, these student loans are not eligible for bankruptcy protection. The only way to settle these loans, other than paying them in full, is proving “undue hardship,” which can be very difficult to fulfill the legal requirements of.
Judging the value of an education
The justification for many families and students that take out private student loans is that an education will always pay for itself. No matter what the cost of a degree, the belief has been that the degree would pay for itself with better employment opportunities. It is true that with more education, average salaries go up and unemployment and underemployement go down. The mathematics of whether a degree is “worth” the high cost, though, is thrown off by the increase in the cost of education. While median family income between 1982 and 2007 increased by 147 percent, tuition and fees increased 439 percent, according to the National Center for Public Policy and Higher Education. The Bureau of Labor Statistics found that in 2009, the average difference in weekly pay for a high school graduate and an associates’ degree is $135 a week.
The real question behind these private student loans with no credit check, for students, is whether they are getting in over their heads with education debt. With 25 percent of students borrowing more than $30,000 to get degrees and student loan default rates skyrocketing, it is a question that many students will have to consider much more closely.