Will private student loans become dischargeable in bankruptcy?

Many residents of Mississippi have likely heard plenty about the U.S. student loan crisis. Estimates regarding the current amount of outstanding student loan debt place the number at around $1.1 trillion. More and more Americans have been seeking a college education, but swiftly-rising tuition prices and a struggling economy have combined to put student loans on many graduates' list of unpaid bills. Unlike other forms of debt, though, such as credit card debt or mortgage debt, student loan debt is currently not dischargeable through personal bankruptcy, with very few exceptions.

When a student attends college, he or she often has their choice of federal or private student loans. Currently, neither is easily dischargeable in bankruptcy, but one U.S. Senator is trying to change that. Senator Tom Harkin, a Democrat from Iowa, has put forth a measure that would allow some holders of private student loans to discharge parts of those loans through bankruptcy. The U.S. Department of Education holds most outstanding student loan debt, but private lenders account for between 10 to 15 percent.

Critics of the proposal say interest rates would potentially go up if some private loans were to become dischargeable through bankruptcy. On the other hand, countless college graduates and even college dropouts are in dire need of manageable payments. With many young adults coping with unemployment, some cannot even pay any of their student loan bills, while others are refraining from buying homes and buying other consumer goods just to afford the bare minimum payment on their student loans.

Interestingly, the bill isn't expected to pass this year, despite the financial challenges of many with student loans. November midterms and broader partisan arguments over policy in higher education may prevent the bill's passing, but the fact that it is on lawmakers' radars at the federal level is an encouraging sign for graduates in Mississippi and across the country.

Source: The Wall Street Journal, "Harkin opens door to bankruptcy options for student loans," Josh Mitchell, June 25, 2014

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