CFPB, Obama Administration urges Congress to allow students to wipe out private student loans in bankruptcy

The Consumer Financial Protection Bureau and the Department of Education issued a reporton the status of private student loans. Americans owe more than $150 billion on such loans — much less than on federal loans — but these private loans don't have borrower-friendly repayment plans and they're poorly understood by those who take them out. When you hear graduates complain about the weight of student loans, it’s the private kind they’re typically talking about.

An interesting recommendation by the CFPB and Ed Department is to allow borrowers to discharge private loans in bankruptcy, something banned only recently in the 2005 overhaul of the bankruptcy law.

“Drawing on this history, Congress might permit discharge of private loans after a period of time in repayment,” the agencies wrote in a report.

Other consumer borrowing, such as credit cards, can be discharged in bankruptcy, and there's no reason private student loans shouldn't be, either. After all, private lenders made a business decision to make a loan and should bear the burden of that decision.

Federal student loans shouldn't be allowed to be wiped out in bankruptcy, though. These loans made with taxpayer money are awarded to students -- creditworthy or not -- as part of a public policy to help those in need afford an education. The loans are capped for undergraduates, so borrowers can’t get in too much trouble. And Uncle Sam has all sorts of repayment plans — even loan forgiveness — to help those who are struggling. That’s all very generous, and for that generosity, taxpayers deserve to be repaid. Besides, if borrowers could walk away from federal student loans, it would create more financial strain for the country.

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