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July 24, 2012

Public Citizen Urges Greater Access to Courts for Student Loan Borrowers

Report Documents Need to End Forced Arbitration in Private Student Loan Contracts, Revise Bankruptcy Law

Note: Today the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection meets to conduct a hearing titled “Private Student Loans: Providing Flexibility and Opportunity to Borrowers?”

WASHINGTON, D.C. – Those with grievances against the predatory private student loan industry are not being given sufficient access to the justice system, Public Citizen said in a report published today.

The report, called “Between a Rock and a Hard Place: Courthouse Doors Shut for Aggrieved Private Student Loan Borrowers,” highlights the difficulty that many student loan borrowers face when seeking redress in both civil and bankruptcy courts.

Because of the fine print in lending contracts, many borrowers find that they have unwittingly given up their right to go to court. Instead, to settle legal disputes with lenders, they are forced into individual arbitration, a private proceeding that is designed to heavily favor lenders, allowing them to set the rules, select the setting and choose the arbitration provider. In many instances, lending contracts also explicitly prohibit borrowers from participating in class-action lawsuits, which can be an efficient method to resolve similar consumer claims. 

“A goal for companies that insert forced arbitration in their contracts is to eliminate class actions, which for many claims against private student loan lenders are the only feasible way to pursue relief,” said Christine Hines, consumer and civil justice counsel for Public Citizen.

In 2005, Congress passed legislation that made it almost impossible for financially burdened borrowers to cancel their student loan debt through bankruptcy. After the law passed, the private student loan industry boomed. Sallie Mae the largest lender of private student loans, saw its portfolio of “non-traditional” loans grow from $3.7 billion in 2006 to $5.1 billion in 2008. Meanwhile, students became increasingly strained by the high interest rates and unjust payment terms.

According to the report, many of these types of loans are taken out to cover costs at for-profit institutions. Such schools have fallen under increased scrutiny in recent years for engaging in unfair, deceptive, and abusive acts and practices toward their student borrowers. Additionally, many are provided overpriced educations that do not prepare them for the workplace, which means that they can have difficulty securing employment. As a result, borrowers of these private loans are often left with unmanageable levels of debt and no meaningful way to seek recourse for alleged harms.

“Lending practices in the for-profit college industry are particularly egregious,” said Micah Hauptman, financial campaign coordinator for Public Citizen. “These institutions often provide high-cost loans to student borrowers, knowing many will never repay them. If that’s not predatory, I don’t know what is.”

To ameliorate this problem, the report makes two major recommendations to the federal government.

First, the Consumer Financial Protection Bureau (CFPB) should use its authority to end forced arbitration in private student lending contracts. Borrowers should not be denied their ability to access the court simply because they want an education, Public Citizen maintains. The CFPB has begun to address forced arbitration in contracts for consumer financial products and services, including the launching of a mandated study in April 2012. The agency must act quickly to eliminate the predatory practice.

Second, Congress should pass legislation to amend the federal bankruptcy code and thus treat private student loans as most other consumer loans that are dischargeable in bankruptcy. Two bills that would restore borrowers’ access to bankruptcy courts, the Fairness for Struggling Students Act of 2011 (S.1102) and the Private Student Loan Bankruptcy Fairness Act of 2011 (H.R. 2028), have been introduced in Congress but have yet to gain traction. Even Sallie Mae, the largest lender of private student loans, is in favor of a change in the law. According to the report, the firm would back the cancellation of loans for those who have made a good-faith effort to repay them but still experience financial hardship.

To read the report, visit: http://www.citizen.org/Page.aspx?pid=5515.
 

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