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Private student loans may soon be dischargeable in bankruptcy

On our Atlanta bankruptcy blog, we recently wrote a blog post asking a question that many economists and debtors' advocates have asked in recent months: why are student loans still nondischargeable in bankruptcy? But although no one has been able to come up with a good answer, a recent report has prompted a discussion about whether private student loans should be made dischargeable, indicating, at the very least, progress.

Until the mid-1970s, both private and federal student loans could be discharged in bankruptcy. Then, Congress changed bankruptcy laws so that federal loans could not be discharged. The following decade, Congress added private student loans that were guaranteed by a nonprofit to the list of nondischargeable loans, and lenders quickly became backed by nonprofits in order to qualify under the law.

The change was cemented in 2005, when private loans gained the same full protection as federal loans. Now, student loans can only be discharged when paying them is deemed an "undue hardship," a test which very few debtors can meet.

But now, following a new report by the U.S. Department of Education and the Consumer Financial Protection Bureau, private student loans may become dischargeable once again.

Advocates for the change say that the differences between federal and private student loans make the latter much more difficult to repay. In federal loans, for example, debtors can get deferrals or forbearances, or can repay their debts based upon their income. Private lenders do not usually offer such leniency. Further, they have high interest rates and fees, making them more akin to credit cards than student loans.

"They are a private and commercial product designed to make money," said Lauren Asher of the Project on Student Debt. "They are like credit cards and charge the highest rates [to those] who can least afford them."

Source: The Baltimore Sun, "Report: Let private student loans be discharged in bankruptcy," Eileen Ambrose, July 29, 2012

At our Georgia bankruptcy law firm, we help clients who are dealing with student loan debt find alternative solutions to their financial problems. For more information, please visit our student loan page.