Senate bill would waive student loans in bankruptcy

Student loans have long been exempt from the protections offered by bankruptcy, but a new Senate bill would change that. The move come as the White House and lawmakers are working on multiple fronts to attack what is being called a student-debt crisis. 

Private student loans would no longer be exempt from protections when borrowers file for bankruptcy under a bill introduced in the U.S. Senate.

The effort, sponsored by Sen. Richard Durbin of Illinois and signed by 12 other senators, comes as the White House and lawmakers are working on multiple fronts to attack what is being called a student-debt crisis.

Roughly 40 million Americans currently carry student-loan debt, starting out with an average bill of $29,000, according to the Consumer Finance Protection Bureau.

Since 2005, people filing for bankruptcy protection haven’t been able to get student loans cleared. Before that, only government and secured loans were exempt.

“Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family,” Durbin said in a written statement. “It’s not only young people facing this crisis, it is parents, siblings, and even grandparents who co-signed private loans long ago and are still making payments decades later.”

“It’s time for action,” he added. “We can no longer sit by while this student loan debt bomb keeps ticking.”

According to Durbin’s office, borrowers currently owe $165 billion in private student-loan debt, which often has high interest rates and other fees.

When the law was changed in 2005, it incentivized banks to offer high-cost private loans to students who are sometimes unable to pay them back, Durbin said.

The bill, filed Thursday, would return the matter to the set of laws that had existed since 1978. Secured and government loans were the only ones that were exempt from bankruptcy protections under those statutes.

But those loans also have caps on interest rates, flexible payment options and, in some cases, opportunities to get balances waived entirely.

The fate of the bill is unclear. Durbin, and his dozen co-sponsors, are Democrats in a chamber controlled by Republicans.

On Tuesday, President Barack Obama rolled out a “Student Aid Bill of Rights” aiming to help make repaying student loans easier.

With the document, Obama ordered federal agencies to make a handful of changes to that effect. Among them, the Department of Education will create a website to let student loan borrowers file complaints and provide feedback about lenders, collection agencies and colleges and universities involved in collecting on their debt.

Also, companies that service student loan will be required to alert borrowers when they’ve fallen behind on their payments, or when they’ve been transferred to another collector.

Doug Gross is a staff writer covering personal finance for NerdWallet. Follow him on Twitter@doug_gross and on Google+.