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New Legislation Proposed to Discharge Private Student Loans in Bankruptcy

Millions of students enter college with high hopes of landing “the big job” after graduation.  Armed with good intentions and laden with student loan promissory notes, off they go into the world. Then, life happens and many graduates end up struggling mightily to repay their student loans.

In addition to high unemployment rates and the recent collapse in the housing market, student loans debts helped to create unmanageable debt to income ratios for millions of Americans. Even those graduates who find employment quickly often wrestle with debt because their salaries not as high as expected. Reports show that this year the amount of student loan debt exceeded $1 trillion, nearly triple the amount reported in 2004.  Student loan debt negatively impacts the already struggling housing market.  Economists say that people burdened with high student loan debt often delay purchasing houses until they pay down their debt. Some analysts predict that this trend will ultimately harm the national economy which relies heavily on robust consumer spending to keep it healthy.

Consumers who are over-burdened with debt can usually turn to bankruptcy for relief.  However, this option is not necessarily available to those seeking respite from student loan debt.  Since 1978, the Bankruptcy code has excluded federal student loans from discharge.  In the early 1990s, the amended Regulations included private student loans in the same non-dischargeable debt category.  Under current bankruptcy rules, debtors must show an “undue hardship” in order to discharge student loans.

Supporters of The Fairness for Struggling Students Act of 2013, hope to change the law relating to private student loans. At present, private lenders providing student loans enjoy government enforced protections not available to other consumer lenders. Borrowers accuse the private loan industry of predatory lending tactics by pushing high interest loans on students who have no means of repayment and offering debtors little flexibility in repayment options.

Until the lawmakers come up with a plan, people besieged with student loan debt will have to simply grit their teeth. For now, bankruptcy is not a viable option. However, there may be other solutions available. An experienced bankruptcy lawyer can help you find a solution that meets your needs.

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