Legislators call for discharging student loans in bankruptcy

Recently, there has been a significant push to allow debtors to discharge student loans during bankruptcy. As the law stands, student loans are one of the few debts that a debtor usually cannot discharge through a Chapter 7 bankruptcy.

The only way to discharge your student loans in bankruptcy is to prove that repaying those loans would impose undue hardship on you. This is a very difficult standard to meet. To prove undue hardship, you must show:

  • You are unable to maintain a minimal standard of living due to repayment of the loans
  • There are additional circumstances that show your financial state will last during a significant portion of your student loan repayment period
  • You made a good faith effort to repay the loans, such as consolidating your loans, attempting to find a better job, etc.

The court will use its discretion to decide if undue hardship exists. Generally, courts will examine your monthly income, reasonable expenses, earning potential and the efforts you have made to repay the loans. 
Crippling student loan debt

The total U.S. student loan debt is even greater than credit card debt, at approximately $867 billion. The individuals and groups who would like to change the system believe that private student loan debt is especially concerning, since many private loans do not offer income-based repayment or other debt management options.

Sallie Mae, the largest private student loan lender in the U.S., supports loan discharge reform as long as students have made a good-faith effort to repay the loans during at least a five-year repayment period. 

Those opposing the discharge of student loans in bankruptcy state that the discharge would force lenders to increase interest rates on those loans. Thus, the cost of student loans would increase for all borrowers. Instead, they say, the issue is not student loan debt per se, but the root of that student loan debt: tuition inflation. 
Source: SFGate, “Durbin urges private student loans be discharged in bankruptcy,” Janet Lorin, Mar. 21, 2012.


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