Student loans outpaced credit cards in the composition of the nation's debt load for the first time last year, according to the New York Times, and they show no signs of slowing.
To help address the growing issue of overwhelming student debt, a group of legislators have introduced a pair of bills aimed at changing the way that private student loans are treated during bankruptcy proceedings.
Current law makes it nearly impossible to discharge student loans through bankruptcy because a person seeking bankruptcy must prove that repaying the student loans would be an "undue hardship." This is a very difficult standard to meet, and has been applied inconsistently by the courts.
In contrast, mortgages, credit cards debts and even gambling losses are routinely dismissed through bankruptcy without the requirement of undue hardship. The proposed legislation would eliminate the undue hardship requirement for privately funded student loans, making it easier to discharge those debts in bankruptcy.
The average 2009 college graduate left school with $24,000 in student loan debt, and the total is often much higher for graduates with advanced degrees. While educational loans have traditionally been viewed as an investment in future earnings, only 56 percent of graduates in 2010 were able to find work.
Proponents of the bill argue that, without the availability bankruptcy as a safety net, many students may be dissuaded from pursuing an education because the threat of financial ruin appears too great.
Because the bills apply only to private student loans, federally funded student loans would not be affected by the proposed legislation.
While federal student loans cannot be discharged in bankruptcy, borrowers of federal student loans have access to other types of relief, such as the Income-Based Repayment or Public Service Loan Forgiveness programs. These programs are not available to borrowers of private student loans, making the proposed bankruptcy legislation all the more necessary.
