Private Student Loan Debt: Now Forgivable in Bankruptcy Discharge

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GeorgeWFor years, bankruptcy attorneys would inform their clients that student loan debts could not be discharged. In the past, these debts were unforgivable regardless of whether a student has completed his or her degree. A new legislation has come forward in Congress that will act as an aid to previous or current students with high outstanding student loan debts.

On February 6th, U.S. Congressmen Steve Cohen (D-Tenn) and Danny Davis (D-Ill,) introduced bill HR 532. This law will allow bankruptcy judges to treat privately issued student loans in the same way other forms of private debt are handled.

Similar bills have been introduced to Congress on five other occasions, but the supporting congressmen are true believers that the legislation has a good chance of passing this time. After this past election, there is a high amount of support for students. These programs have been introduced, mainly because of the struggling job market for recent graduates.

Essentially, this bill would modify the bankruptcy code to let private student loans be discharged during bankruptcy proceedings. A recent report from the CFPB stated that about $150 billion of the currently outstanding $1 trillion in student loans were from private lenders. Eliminating student loan debts, will allow former students to move on with their lives and start fresh.

The Student Aid and Fiscal Responsibility Act has effectively stopped all federally guaranteed private student lending. Due to the bill, private student loans are now directly originated by the Department of Education. It should be noted that this proposed legislation would not allow any federally guaranteed student loans to be discharged in a bankruptcy.

Nonetheless, there are still a number of private student loan lenders. Federal loans can only be used to cover tuition and fees, most students use private loans to pay for incidental expenses. Private student loans can also be used to cover tuition at non-accredited schools.

It is believed by many political analysts that this bill has much better chances of passing over similar bills introduced in recent years. The last election has showed that a large percentage of voters are concerned with their student loan bills. A recent study shows that nearly half of all current student loans are in deferred status. This means that the number of Americans with student loans is expected to grow significantly over the next several years. Unless the economy improves significantly, it is believed that many of these people will have difficulty finding a job to pay back their loans. In its early stages, the bill has already acquired 14 sponsors.

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