• 11
  • August
    2011

The bankruptcy laws were drafted with the intention of providing debtors with a fresh start. Debtors buried under credit card debts, loans or crippling mortgages can get out from under by filing bankruptcies. It would be logical to think the same safety hatch might be available to college graduates unable to find jobs in the country's stagnant economy. Unfortunately, there isn't one.

It wasn't always this way. While federal student loans have not been dischargeable in bankruptcy since 1978, private student loans were dischargeable until 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act went into that effect. Since that time all student loans have in essence been non-dischargeable.

Presently, the only way a student loan can be discharged in a bankruptcy is by the introduction of an adversary proceeding, which is a separate action from the bankruptcy petition. In the adversary motion, the debtor must show the court that repaying the student loan debt will result in an undue hardship on the debtor and his/her dependents.

This is a high hurdle that most debtors cannot meet. While the test is not set in stone, generally a debtor must prove the following:

  • The debtor will be unable to keep a "minimal" standard of living if forced to repay the loans
  • There are other circumstances present that would make it unlikely the debtor will be able to improve his or her situation for the majority of the repayment period
  • The debtor has made a good faith effort to repay the debt

Student loan companies have taken advantage of the law, lending indiscriminately to students without any federal limits on the amounts they can lend. These private companies have enjoyed great profits while sitting comfortably in the knowledge that the student borrowers will have no opportunity to escape these debts. Over the past ten years, private student loan lending has increased by 27 percent.

According to Forbes, US Senator Dick Durbin is concerned about the burden of these private loans on optimistic students. "Some of these private student loan repayment schedules -with double-digit interest rates - can follow a student borrower from graduation to the grave."

The Illinois senator wants to reign in the lenders. He is introducing legislation to restore the law to the way it was prior to the 2005 bankruptcy amendments, and make private student loans dischargeable. He hopes of making private lenders more cautious about their lending practices.

Source: http://www.forbes.com/sites/ilanagreene/2011/08/02/college-loans-for-life/