Will Student Loans Become Dischargeable Through Bankruptcy?

Posted on March 23, 2015 at 12:00pm by

President Barack Obama has tasked his administration to investigate options for allowing private student loan debt to be dischargeable through bankruptcy. The new policy would be a change from previous legislation passed by Congress in 2005 that prohibited private student loans from being dischargeable through bankruptcy.

Advocates for the change hope that by allowing private student loans to become dischargeable as other forms of debt are, such as credit cards or mortgages, financially burdened graduates could become more independent.

American college graduates owe an average of just under $30,000, with the number rising every year. Student loans are currently a permanent form of debt, as both federal and private student loans are very difficult to discharge through bankruptcy or other means.

How Do Private and Federal Student Loans Differ?

Recent changes to repayment options for federal student loans have made monthly payments for graduates more manageable, such as the income-based repayment option, which caps monthly payments at 10 to 15 percent of a borrower’s income. Federal loans also offer generous grace and deferment periods for graduates looking for work.

Private loans rarely offer similar lenient options for repayment. Private student loans account for 10 percent of student debt and federal loans make up the remaining 90 percent.

According to Federal Reserve data, about a quarter of borrowers are behind on their student loan payments. Loan balances and the number of borrowers behind on payments have doubled since 2007.

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Did You Know? The current combined student loan debt nationwide has risen to over $1 trillion with no sign of stopping.