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Congress Debates Whether to Allow Student Loan Debts in Bankruptcy

Few students can afford to pay for college completely on their own. The majority of students take out at least some form of financial aid to pay for their college education.

Sad10_07012014According to the 2007-08 National Post-Secondary Student Aid Study (the last year for which data is available), 66 percent of undergraduate students finished their degree with some debt, and the average debt was $27,803.

Student loan debt for graduate and professional students such as those attending law school or medical school can exceed $100,000.

Students graduating with poor job prospects in a still floundering economy may find themselves unable to pay back these debts. While many government loans offer income-based repayment plans and other options for those experiencing financial hardship, many private loans do not.

The high cost of student debt and the limited options for those with private loans has spurred some legislators to advocate for allowing private student loan debt to be included in a bankruptcy filing.

Proposed Changes

Changes to the bankruptcy laws in 2005 broadened the definition of the type of student loans that were excepted from a discharge in bankruptcy.  In essence, the changes made private student loans ineligible for discharge in a bankruptcy - except in extreme cases of hardship, for which a petition to the Bankruptcy Court could be made. Federal student loans have been ineligible for discharge unless a showing of "undue hardship" could be made by the bankruptcy debtor for two decades.

Sen. Rick Durbin (D-IL) has proposed allowing private loans to be included in a bankruptcy. A bill was proposed in 2011 to make these changes, and legislators are currently debating it.

Some feel that allowing the change would prompt abuse from student borrowers, but others note that rising tuition costs, high interest rates, and fewer economic opportunities have led to a crisis in student-loan lending and that students need relief where appropriate.

In the fourth quarter of 2011, outstanding student loan debt reached $867 billion, according to the Federal Reserve Bank. Student loans exceed what Americans owe on credit cards and auto loans combined. The Consumer Financial Protection Bureau estimated that total federal and private student loan debt is more than a trillion dollars.

Bankruptcy For Debt Relief

If you are struggling with student-loan debts, you don't have to wait until Congress makes a decision to act. Bankruptcy may be able to provide you some debt relief by eliminating other unsecured debts or providing a debt-repayment plan for your other debts, allowing you to free up the income needed to pay back your student loans. A North Carolina bankruptcy lawyer at the Law Offices of James Scott Farrin may be able to help! Call 1-866-900-7078 to get a free evaluation of your case to find out what type of bankruptcy may be appropriate for you.

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