2005 Law Made Student Loans More Lucrative The Bankruptcy Abuse Prevention and Consumer Protection Act was enacted in 2005 to include private student loans as one of the 10 debts that can't be forgiven. An industry analyst says that the rule means lenders have no risk, making student loans a very lucrative business.

2005 Law Made Student Loans More Lucrative

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There is another more recent federal law that adds to the attractiveness of this seemingly risky business of lending money to young adults whose prospect for disposable income might not easily match the rising cost of higher education plus interest. Two years ago, a rewrite of the federal bankruptcy rules took effect under a law with a pleasant-sounding title: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. That law gave new status to student loans made by non-government, for-profit lenders. A borrower - who declared bankruptcy - could not get out of paying a loan like that.

Stephen Burd, who's now with the New America Foundation, covered this issue for The Chronicle of Higher Education. Welcome to the program.

Mr. STEPHEN BURD (Senior Research Fellow, New America Foundation): Thanks for having me.

SIEGEL: And I gather, this change didn't just happen in the bankruptcy law. There was a lot of lobbying that went into it.

Mr. BURD: The student loan industry lobbied hard to put this exemption into the bill. For example, between 1999 and 2005 - the years in which the bill was under consideration - Sally Mae, the nation's largest student loan provider spent $9 million lobbying Congress. In addition, during that period of time, Sally Mae's pack provided more than $130,000 in campaign contributions to members of the House and Senate Judiciary Committee - the key panels in charge of legislation.

SIEGEL: And their agenda was essentially to make this kind of student loan a non-dischargeable debt, as they say in…

Mr. BURD: Right, to make sure that private loans could not be discharged through the bankruptcy laws.

SIEGEL: Now, before 2005, there were federal loans that did enjoy that kind of protection from the bankruptcy laws. So this was extending a protection that existed?

Mr. BURD: Yes, that's correct. Since 1998, students haven't been able to discharge their federal loans through bankruptcy, lawmakers have been tightening it up these restrictions since the 1970s, when there were reports of deadbeat borrowers who are taking out student loans without having any intension of repaying them. So there has been this restriction on federal loans. The loan industry, I believe, argued that all educational loans should have the same restrictions on them.

SIEGEL: The story though of students who would take out student loans with no intention of repaying them and declare bankruptcy where relatively early in their adult lives they didn't have many assets at stake. I haven't found any actual data describing how common this was.

Mr. BURD: No, there isn't data. A lot of these restrictions have been put on because of anecdotal information. The interesting thing I'd point out about the private loan part of this is that although the bankruptcy bill was before Congress for almost a decade, I believe, there was very little to no discussion about this provision. In fact, there were no hearings on this. It didn't get a lot of attention because private loans as opposed to federal loans used to really only go to graduate and professional students. But over the last 10 years or so, they've increasingly been going to undergrads.

SIEGEL: Well, if somebody now enters into bankruptcy proceedings, they would have certain non-dischargeable debts, possibly, which would be very, very hard, if impossible, to get out of paying. And the list of these debts is a rouge's gallery of financial defaults. You can't get out of paying child support, alimony, personal injury payments for injuries you inflicted while driving drunk, fines to the government, taxes, debts you incurred through fraud, and seemingly, a little more innocent to those, student loans.

Mr. BURD: Well, the federal government, you know, feels that it's important for students not to be able to discharge their federal loans. And, you know, they do have a bit of a case in that the government sets the terms of these loans and provide large subsidies on them. The government pays the interest while students are in school and pays large subsidies to lenders to make the loans in the first place.

On the other hand, with the private loan program, this isn't the case. And it's almost as if the government has given a blank check to the lenders to say, you know, charge whatever interest rates you want and we'll make sure that borrowers will have to repay you. So there's a lot more - I think there's a lot more anger and frustration about the fact that students can't get their private loans discharged. The government doesn't have a stake in it.

SIEGEL: Stephen Burd of the New America Foundation who used to cover this for the Chronicle of Higher Education. Thanks a lot for talking with us.

Mr. BURD: Thanks for having me.

(Soundbite of music)

SIEGEL: The challenges of putting on an exhibit of massive, metal sculptures at New York's Museum of Modern Art. And a new behind-the-scenes collection of Rock n' Roll photographs. Those stories, just ahead, on ALL THINGS CONSIDERED.

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