Bill may allow discharge of student loans in bankruptcy

Student loans are a unique type of debt because they are at least partially federally owned and cannot be discharged by bankruptcy. A bill in subcommittee hearings, however, would allow bankruptcy to clear student loans.

The current status of student loans

There are two types of student loans: subsidized and unsubsidized. Subsidized loans are government-supported, while unsubsidized loans are basically a differently structured personal loan. Both types of loans cannot be canceled out by bankruptcy. In 2010, 29 of the 72,000 student loan borrowers that filed for bankruptcy were able to prove enough of a hardship to have student loans discharged. Student loans have been called the “next big bubble” because more and more students are taking on heavier debt loans to fulfill educational goals while the job market recovers.

Student loans past due

Government statistics say that more than 25 percent of individuals with student loans have payments that are past due. About 15 percent of students who attended private colleges and 7 percent of students who attend public colleges have defaulted on their loans.

A student loan default means that the federal government can intercept any tax refunds you may receive until the loan is paid off. Your paycheck can be garnished, any and all federal benefits can be canceled, and the government or private lender can sue you to recover the money, which can lead to liens on property or income. In short, student loans past due mean that the debt will follow you and remove your eligibility for any federal program until it is paid off. Student loans are one of the few types of debt that cannot be discharged under almost any circumstances.

[You can still qualify for student loans after bankruptcy.]

Attempts to change the system

Senate Majority Whip Richard Durbin is trying to drum up support for his bill that would make student loans subject to bankruptcy discharges. This is not the first time such a bill has been presented; it was last presented to Congress in April of 2010. That bill died, despite support from student advocates, lenders and a wide range of members of Congress. The federal government was not able to balance the risk of discharging federally owned loans.

There appears to be broad support for the latest effort, but the potential hit to the federal budget could make it a very tough sell. The bill is still in subcommittee, so it will need to make its way through subcommittee, committee, Senate vote, House vote and presidential approval before it becomes law.

Sources

NoLo.com
Marketplace.org
FastWeb