Senate banking bill could give student loan borrowers new flexibility

Students pull a mock 'ball & chain' representing the $1.4 trilling outstanding student debt at Washington University in St. Louis, Missouri.

Paul J. Richards | AFP | Getty Images
Students pull a mock ‘ball & chain’ representing the $1.4 trilling outstanding student debt at Washington University in St. Louis, Missouri.

Student loan borrowers could get some wiggle room when it comes to repaying private loans, thanks to two new proposals in the Senate banking bill.

The provisions in the bill would adjust how private student loan lenders treat the death or bankruptcy of co-signers, as well as how defaults are reported on a borrower’s credit report.

The changes would have positive results for borrowers, student loan experts said.

“It’s bipartisan, so this legislation is probably going to move,” said Mark Kantrowitz, a student loan expert and publisher at the website Private Student Loans Guru.

The first proposal makes it so that a lender cannot declare default or accelerate a private education loan when a co-signer of the loan dies or declares bankruptcy.

In addition, when the student dies, the private loan lender will be obligated to release the co-signer from the debt, if any remained.

Those new rules would only apply to private loan agreements made at least 180 days after the bill is passed.

“From a fairness perspective, it makes sense to make this no longer an option for future private student loans,” said Betsy Mayotte, founder and president of The Institute of Student Loan Advisors.

Mayotte said she has seen cases where a lender has accelerated a loan in order to make a co-signer’s estate liable.

Lenders do have choices in terms of how they enforce these rules, Mayotte said. Anyone who takes out a private student loan, particularly those who need a co-signer, should read the promissory notes carefully, she said.

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The bill also proposes that lenders make it easier for borrowers to get a one-time removal of a default on their loan from their credit report.

That is if the financial institution offers a loan rehabilitation program whereby a borrower demonstrates the ability to make timely monthly payments and the ability to repay the loan.

Under the terms of the proposal, the lender would have to meet certain requirements in order for the loan rehabilitation program to be considered valid. A borrower would only be able to use this option once per loan.

While there is currently no requirement for lenders to provide rehabilitation programs, it is often possible to negotiate with them to clean up your record in exchange for resuming payments on the loan, Kantrowitz said.

“There’s no formal requirement that lenders provide rehabilitation, but it is one of the informal things that happens in practice,” he said.

Talk to your lender

Many borrowers make the mistake of not trying to work with lenders to alleviate issues when they arise, according to Kantrowitz.

“Too often borrowers don’t talk to the lender,” he said. “They don’t explore options for avoiding default.”

If you are struggling to repay your student loans, call your lender and evaluate your options, Kantrowitz suggested.

You may be able to obtain a forbearance, which can suspend your obligation to make loan payments in the short term, though interest will continue to accrue.

You may also want to consider switching to a different payment plan, which can lower your monthly payments, though it will extend the length of the loan and consequently increase the interest you pay.