Some student loan debt may be dischargeable in bankruptcy one day

There are many reasons why people might consider personal bankruptcy: debt incurred from medical expenses, credit card debt or unfavorable mortgage conditions. One kind of debt that is generally not permissible to be discharged during bankruptcy is student loan debt. However, a new report from the federal education department and the Consumer Financial Protection Bureau says that Congress should explore changing that rule when it comes to private student loans.

For many young people with college degrees, the largest portion of debt they have is due to student loan debt. It is not inconceivable for someone who has gone to school for multiple degrees to have student loan debt in excess of $100,000. However, this is, to date, not something that can be discharged via personal bankruptcy, which many think is unfair.

One observer compared the situation to having private student loan debt to credit card debt. Credit cards used to pay room and board wouldn't be thought of as financial aid, but private loans are -- even if they carry high interest rates similar to that of credit cards.

It is important to note the distinctions between private student loans and government student loans. While neither is dischargeable in bankruptcy, the federal student loan program has several conditions to cater to people in financial straits, such as deferrals and flexible payment plans. Private student loans, however, are not required to have these same features. They act more like a business rather than a taxpayer-backed program. Not surprisingly, the issuers of these loans oppose the idea. In any case, any changes to the law are far from a sure thing at this point.

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

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