Senator Hassan, Colleagues Call for Investigation of Student Loan Lenders that Intentionally Misrepresent Loan Cancellation Eligibility to Borrowers

WASHINGTON – U.S. Senator Maggie Hassan joined her colleagues in sounding the alarm on private student loan companies that are intentionally misrepresenting to borrowers the possibility of getting their student loans erased in the event of bankruptcy. The letter was led by Senators Dick Durbin (D-IL) and Sherrod Brown (D-OH).

The Senators’ letter to the Consumer Financial Protection Bureau (CFPB) comes after a report from the Student Borrower Protection Center (SBPC) that found that 2.6 million borrowers with “non-qualified” private student loan debt could be eligible for loan cancellation through bankruptcy, but lenders are intentionally misrepresenting this eligibility to borrowers. Federal law prevents “qualified” student loans – those federal and private loans used to finance education at an institution of higher education that qualifies for federal student aid – from being erased or “discharged” in the event of bankruptcy except in cases of “undue hardship.” Non-qualified private loans can be discharged without meeting the undue hardship burden.

“The SBPC found that private student loan lenders took advantage of the widespread belief that all private student loans are non-dischargeable in bankruptcy and that lenders marketed their non-qualified education loans under this false pretense,” the Senators wrote. “At the same time, when these companies sold non-qualified debts to Wall Street investors, they explicitly disclosed that non-qualified education loans were eligible for discharge in bankruptcy—telling investors the truth while lying to borrowers.”

The Senators continued, “There is growing bipartisan consensus in Congress that student loan bankruptcy laws should be overhauled to make them fairer and more workable for borrowers who have no other options for relief.  But, as we continue to work on lasting changes to these laws, we must not allow companies to fraudulently prevent borrowers from seeking the little relief that is afforded under current law. We urge the CFPB to review the troubling findings in the SBPC report and take appropriate action.”

Senator Hassan is leading efforts in Congress to protect students, and is also working to strengthen the Public Service Loan Forgiveness program to help ensure that millions of public servants -- such as fire fighters, law enforcement, teachers, and members of the military -- qualify for the loan forgiveness that they have earned. Additionally, the Senator helped close a loophole in the American Rescue Plan that for-profit colleges use to take advantage of veterans, service members, and their families.

Find a copy of the letter here and below:

Dear Director Chopra:

We write to request that you promptly investigate the findings of a troubling report released by the Student Borrower Protection Center (SBPC) that found that private student loan companies and servicers intentionally misrepresented to borrowers the possibility of discharging certain private student loans in bankruptcy. We urge the Consumer Financial Protection Bureau (CFPB) to investigate these findings and take appropriate action to ensure private student lenders and servicers are complying with bankruptcy law.

According to the SBPC, for decades, private student lenders have intentionally perpetuated the false narrative that all student loans, including all private student loans, are non-dischargeable in bankruptcy except in cases where borrowers meet a standard of “undue hardship.” In reality, these rules for dischargeability of private student loans only apply to qualified education loans.  Qualified education loans are defined in the Internal Revenue Code as loans taken out by an “eligible student” used to finance the cost of attendance at a recognized institution of higher education that qualifies for federal student aid.

However, the SBPC report indicates that private student lenders have long peddled a variety of private student loans that do not meet the definition of qualified education loans and are, therefore, generally dischargeable in bankruptcy.  The SBPC estimates that approximately $50 billion in private student loan debt held by some 2.6 million borrowers falls into this category.  These non-qualified private loans, created by lenders to generate additional revenue, include direct-to-consumer loans and career training loans used for unaccredited schools that do not qualify for federal student aid.  These schools, many of which are for-profit colleges, often provide deficient education benefits and leave students with little other than massive student debt.

The SBPC found that private student loan lenders took advantage of the widespread belief that all private student loans are non-dischargeable in bankruptcy and that lenders marketed their non-qualified education loans under this false pretense.  The report found that lenders included misleading language in their promissory notes, misrepresenting to students that they could not discharge their loans in bankruptcy.  At the same time, when these companies sold non-qualified debts to Wall Street investors, they explicitly disclosed that non-qualified education loans were eligible for discharge in bankruptcy—telling investors the truth while lying to borrowers.

Moreover, the SBPC report shows the extent to which lenders went to collect on the debts that could have been legally discharged—relying on the complexity of the bankruptcy process and abusive collection tactics, such as letters, phones calls, and negative reports made to credit bureaus.  In some cases, lenders pursued legal action to recover debts that already were discharged legally.  The SBPC report estimates that private student loan companies have collected hundreds of millions of dollars on loans in this manner. 

There is growing bipartisan consensus in Congress that student loan bankruptcy laws should be overhauled to make them fairer and more workable for borrowers who have no other options for relief.  But, as we continue to work on lasting changes to these laws, we must not allow companies to fraudulently prevent borrowers from seeking the little relief that is afforded under current law.  We urge the CFPB to review the troubling findings in the SBPC report and take appropriate action.

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