A top Senate Democrat took aim at the private student-loan industry, calling for new rules that would allow wiping away of educational debts during bankruptcy. Majority Whip Richard J. Durbin (D-Ill.) convened a Senate judiciary subcommittee hearing Tuesday to address what one consumer group has called the nation’s next potential “debt bomb.” Research by the Federal Reserve Bank of New York found that Americans owe about $870 billion in student loans; surpassing the amount of outstanding credit-card debt or auto loans. More than a quarter of borrowers had past-due balances.
Of particular concern to lawmakers is the high rate of default on loans by students at private institutions, many of them for-profit colleges. A default can haunt borrowers for decades because consumers cannot discharge student debts if they file for bankruptcy. Other loans, including mortgages and credit-card balances, can be cleared away.
In fact, Durbin has sponsored legislation that would allow private student-loan debt to be discharged in bankruptcy. Though consumers would still be responsible for paying federal student loans. Furthermore, Durbin has held several town halls in Illinois on the issue. And, a recent hearing was the latest attempt to drum up support in the face of partisan gridlock on Capitol Hill. However, some advocacy groups say the legislation does not go far enough. Moreover, some want all student loans to be able to be discharged.
On July 1, a five-year reduction in the interest rate for new federally subsidized Stafford loans will expire, doubling the rate from 3.4 to 6.8 percent. Sen. Jack Reed (D-R.I.) and Rep. Joe Courtney (D-Conn.) have introduced a bill that would keep it at its current level. Letting it rise could cost some students as much as $5,000 over 10 years. President Obama has proposed extending the lower rate through 2013.
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