The Education Department and the Consumer Financial Protection Bureau (CFPB) want Congress to make it easier for people to discharge a portion of student debt by filing for bankruptcy protection.
The recommendation wouldn't affect the vast majority of student debt, which is issued by the federal government, but would apply to the roughly $150 billion, or 15% of total outstanding student debt, issued by private lenders such as SLM Corp.'s Sallie Mae and Wells Fargo & Co.
CFPB Chief Richard Cordray said Congress should consider modifying a 2005 law that, except in rare circumstances, prohibits discharging private student loans through bankruptcy.
The law doesn't appear to have met its objectives of lowering borrowing costs and expanding access to private loans, Cordray said, adding that it would be prudent to consider whether the code should be modified because of the impact on young borrowers in challenging labor-market conditions.
Private lenders warn that such a change could hike interest rates, since the risk of losses would rise. They argue that bankruptcy provides too big a temptation for students to walk away from their debt obligations because, unlike homeowners, for example, many students lack major assets.
Sallie Mae, the nation's largest private issuer of student loans, said it would back a legislative change that would allow bankruptcy in limited cases.
"Sallie Mae continues to support reform that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five- to seven-year period and still experience financial difficulty," it said in a statement.
The report, to be released later this week, attributed some of the student debt problems to what it described as loose lending practices on the part of private lenders in the years leading up to the financial crisis, although many in the industry have disputed at such criticism.