Sorry, I should have caught this on Thursday night. Both the Senate and House introduced legislation to allow for private student loans to be dischargeable in bankruptcy. Here is an excerpt from a press release from Senator Durbin's office:
Before changes were made to the bankruptcy code in 2005, only government issued or guaranteed student loans were protected during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education. Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005, so that privately issued student loans will once again be dischargeable in bankruptcy."
Just a day earlier, a Sallie Mae executive had this to say about private loans and bankruptcy at the Fitch Ratings conference in New York:
One investor at the conference had this to say if the law should change making private loans dischargeable in bankruptcy:
So, I guess the question remains what impact dischargeability might have on the availability and pricing of private student loans. A few thoughts:
- Given that most private loans made today have cosigner rates of 80-90%, the risk would appear to be in the 10-20% of the portfolio without a cosigner. Recall also that credit standards have been increased too, with Sallie Mae now originating loans to borrowers with average FICO scores of 750.
- Then there is the issue of recoveries...perusing Sallie Mae's private credit trust data would seem to indicate that even with the difficulty that borrowers face in discharging their private loans in bankruptcy, the company has not had great success at collecting on defaulted loans. These trusts were not the subprime loans that the company made during the bubble period of 2004-2007 so one would have to assume that the recovery rates on those loans (average FICO score of 623 with cosigner rate of 28%) would be even lower. Figures below are cumulative recoveries as percentage of cumulative principal loss as of February 2010:
- 2005-B: 3.5%
- 2006-A: 3.3%
- 2006-B: 3.6%
- 2006-C: 3.3%
- 2007-A: 2.5%
In the end, if this bill were to become law, I would suspect you would see some combination of interest rate increases and/or increased cosigner rates (perhaps even a requirement) on private education loans as lenders seek to mitigate the risk of reduced recovery rates through bankruptcy discharge and maintain their profit margins.
- On Private Loans and Bankruptcy (September 2009)
- Witness Testimony Now Available (September 2009)
- Senate Bill Provides Bankruptcy Protections to Credit Card Debtors; Will Student Loans be Next? (March 2009)