Proposed bill to discharge private student loans in bankruptcy

February 24, 2013 (Press-News.org) Proposed bill to discharge private student loans in bankruptcy

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Student loans are difficult to discharge in bankruptcy, regardless of whether they are federal or private loans. Under the current law and practice, only borrowers who have suffered undue hardships that result in little or no hope that they will ever be able to repay student loans are eligible for discharge. However, some people believe that this should change.

Senator Dick Durbin is calling on lawmakers to pass new regulations on private student loans. Durbin is sponsoring a bill that would authorize debt forgiveness for private student loans in cases of bankruptcy.

Durbin said many private student loans do not have the same benefits to students that federal student loans do such as the possibility of deferment and fixed interest rates. According to Durbin, two out of three students say did not know the difference between government loans and private student loans, suggesting that students don't know what they are getting into when they take out private loans.

Federal student loans and private student loans have differences

Federal Student Aid, an office of U.S. Department of Education, explains that there is a big difference between a federal student loan and a private student loan. For example, the interest rate of the federal student loan is fixed and is often lower than private loans, whereas private student loans can have variable interest rates, some greater than 18 percent. Moreover, private student loans do not have protections that federal student loans offer like caps on interest rates, flexible repayment options and limited cancellation rights.

With these differences, many people think that private student loans should be treated differently from federal student loans and should therefore be dischargeable in bankruptcy. This used to be the case, but a 2005 law made it difficult for private student loans to be discharged in bankruptcy, just like federal student loans.

Dischargeability of student loans and debt relief generally

Since the 1970s, Congress has debated about whether private student loans should be discharged in bankruptcy. In 1976, Congress first made it difficult for the student loans to be discharged in bankruptcy. In 2005, Congress included private student loans in the non-dischargeability category as part of comprehensive bankruptcy amendments. However, Senator Hillary Clinton from New York introduced her recommendation that Congress should act immediately to eliminate the non-dischargeability provision for private student loans, which was included in the Senate bill in 2006. Now Senator Durbin is sponsoring a bill to authorize the discharge of private student loans in bankruptcy.

Student loans are not subject to any statute of limitations, meaning that the loans will never expire and that the debt sticks with you for a lifetime. Aside from student loans, a bankruptcy petition may help with other debts like credit cards, car payments and even a mortgage payment. If you are overwhelmed with student loans and other debts, a local attorney with bankruptcy expertise may be able to help your situation.