Ever since October of 2005, private student loans, as opposed to those backed by a state or federal agency, have had protection from bankruptcy discharge (except in instances of "undue hardship.") But with overall student loan debt now over $1 trillion, this issue is getting more national attention. Last week, U.S. Congressmen Steve Cohen (D-Tenn.) and Danny Davis (D-Ill.) introduced a bill that would remove this protection.
Although this is the fifth time a bill like this has been introduced, the sponsors feel that this one stands a better chance, given the current focus on student loan debt and, coincidentally enough, a reported rise in student loan debt among members of Congress! The bill would amend the bankruptcy code to allow private student loans to be discharged. The bill has been referred to the House Committee on the Judiciary, of which Cohen is a member.
Bear in mind, however, that private loans make up about 15% of the overall student loan debt in the U.S. Most student loans originate through state or federal programs, and the latter have many different payment options that can make repaying them affordable; not so with private loans.
Private loans may also decline, as parents learn more about federal PLUS loans that can bridge the cost gap after their children have maxed out their Stafford or Perkins options. There is a lot of skepticism among bankruptcy professionals as to whether the bill will pass, but it is certainly a step in the right direction.
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