WASHINGTON — Valisha Cooks, 28, graduated from the University of Phoenix in 2007 with almost $90,000 in debt, a sum so large she ended up filing for bankruptcy.
“I didn’t go to college to borrow a bunch of money and then shirk my responsibilities,” she said. “I earned a degree to better my life and set an example for my son, and I ended up bankrupt and still crushed by private-loan debt with no way out and no light at the end of the tunnel.”
Cooks appeared Thursday at a House hearing looking at changes in how private student loans are treated under bankruptcy rules.
Under current laws, Cooks is still responsible for her loans. In 2005, Congress added private student loans in a category called nondischargeability, meaning they cannot be erased under bankruptcy unless undue hardship can be proven; other types of debt in this category include overdue taxes and criminal fines.
Advocates and opponents argued about the impact of reversing this categorization.
Rep. Steve Cohen, D-Tenn., the subcommittee’s chairman, said students can spend a lifetime paying off their debt to lenders who profit heavily, “which is kind of the American way but nevertheless there’s a better American way, or at least there should be.”
Deanne Loonin, attorney at the National Consumer Law Center, accused the private student loan industry of practicing subprime lending.
“[There] are all the features of subprime lending, including failure to access reasonable ability to repay, so poor underwriting, irresponsible lending, high fees, origination fees up to 10 percent, APRs, at variable rate — 15, 20 percent,” she said. “Basically the most vulnerable borrowers are least likely to be able to repay.”
While Rep. Trent Franks, R-Ariz., the House Judiciary Committee’s ranking member said reform is needed to help students finance education, he is wary about the bill’s impact on the industry, fearful such loans would be unattractive to investors when bundled into securities.
“If lenders are forced to scale back student lending because private student loans are subject to bankruptcy discharge, many students will be denied access to higher education,” Franks said.
He said these loans enable students to choose institutions they want to matriculate at rather than restrict them to ones they have to attend. In addition, changing how private student loans are treated in bankruptcy might encourage people to beat the system by filing for bankruptcy protection given how few assets fresh college grads have.
But Loonin said there’s no proof to support Franks’ point.
“The harsh treatment of students in the bankruptcy system was built on the false premise that students were more likely to abuse the bankruptcy system,” Loonin said. “Yet there is no evidence, and has never been any evidence, to support this assumption.”
Even after filing for bankruptcy, Cooks is on the hook for $627 a month for just the private loans.
“I send them whatever I can afford each month,” she said. “They refuse to negotiate an affordable plan that would allow me to repay my loans.”