Private Student Loans Versus Federal Student Loans

Student Loan Debt Bubble, 1980-2011

Student Loan Debt Bubble, 1980-2011 (Photo credit: Occupy* Posters)

Private student loans are made to prospective students who want to get a post high school education to develop their skills to become more employable. These private student loans are made by banking institutions and companies who specialize in providing money for the cost of higher education. You might think they are basically the same as federal student loans which are loans guaranteed by the government of the United States. If you thought that, you would be wrong.

While basically both private and federal student loans accomplish the same goal of providing money for higher education, they are not always governed by the same laws.

An ABC news article made this point when posting on the internet April 27, 2012.

The article dealt with a former student at Rutgers University who had made student loans to attend college and then sustained a traumatic brain injury that ultimately led to a coma, then death. The story caught national attention when the private student loan bank, Key Bank, continued to try and collect the loan long after the debtor died.

The father, who had co-signed the note, had to eventually come out of retirement to try and pay the loan off. After an online petition signed by over 81,000 citizens requesting Key Bank discharge the loan, the bank finally relinquished and settled the debt last week. The private student loan borrower, Christopher Bryski, died in 2006 of his injuries.

The federal student loans held by Bryski were forgiven upon his death, according to current federal law. There is no such law for private loans, though. Key Bank, although facing a personal relations nightmare, had every legal right to continue seeking the payoff from the co-signing father and/or the boy’s estate. The personal relations pressure of the 81,000 signatures evidently did the trick.

The case has renewed public interest in making laws that are consistent throughout the system. The private student loan industry has substantially grown in the past 25 years having gone into competition against the U.S. Government. The private student loan industry is a multi- billion dollar industry today.

Large banking creditors have spent millions in lobbying Congress to pass friendly lending laws that support the industry. One such successful law passed in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act, made private student loans equal to federal student loans in their exemption from bankruptcy discharge. Before the law was passed, private loans could be discharged in bankruptcy, but today, they cannot be discharged.

Some say private student loan creditors became even more powerful because the loans have been associated with high interest, fees, and penalties the federal loans do not enjoy. That means the industry has a lot to protect that would be unfriendly to the consumer.

There is no doubt in the mind of this blogger that the private student loan industry should be held to the same high standards as the federal student loans. The laws ought to be made consistently across the board to reflect the entire spectrum of the industry. The Bryski case is just one example of the need for reform.

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