Yesterday, the U.S. House Judiciary Committee’s Subcommittee on Commercial and Administrative Law held a hearing to discuss the Private Student Loan Bankruptcy and Fairness Act of 2010.

The Act would reverse current bankruptcy protections for private student lenders included in the 2005 bankruptcy law and allow most private student loans to be discharged in bankruptcy.

The National Association of Student Financial Aid Administrators and other groups representing students, consumers, institutions of higher education, and civil rights and public policy organizations have expressed support for the bill.

Representative Steve Cohen (D-TN), sponsor of the bill and the chairman of the Subcommittee, echoed the support of these organizations at the hearing. He stated, “the bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected.”

Those opposed to the bill, including many nonprofit and state-based student loan providers, cited concerns with regard to increased financing costs, including higher market interest rates for borrowers.  As the President of the Education Finance Council, which represents nonprofit and state-based student loan providers, stated at the hearing, “making all private student loans funded by nonprofits completely dis-chargeable in bankruptcy would raise financing costs, harming the ability of these public -purpose entities to continue to offer below market interest rates to borrowers.”

In addition, opponents of the legislation question why Congress would not extend the same consumer protections to all education loans, regardless of source or tax status of the entity or governmental institution providing the funds.

Two versions of the legislation have been introduced in Congress. The Private Student Loan Bankruptcy Fairness Act of 2010 (H.R. 5043) was  introduced by Rep. Steve Cohen (D-TN) in the House. In the Senate, The Restoring American Financial Stability Act of 2010 (S. 3217) was introduced by Sen. Christopher Dodd (D-CT).

Though very similar with regard to intentions the Senate bill would allow all private education loans to be discharged in bankruptcy, while the House bill would not allow private loans substantially funded by nonprofit institutions to be discharged. Neither bill would allow federal student loans to be discharged in bankruptcy.