Will Student Loans Soon Become Dischargeable In Bankruptcy? Student loans are almost impossible to discharge in bankruptcy, with exception of undue hardship as most graduates who have fallen upon hard times have eventually discovered.  But according to an article in Inside Higher Education, legislators are now moving to consider altering the bankruptcy code to change the way private student loans are treated during bankruptcy.

A quick overview:  Private student loans are borrowed from private lenders such as Sallie Mae or Bank of America, while public student loans are borrowed directly from the government.  The major differences between the two types of student loans are that private student loans typically come with high interest rates and few flexible repayment options, while government student loans have low interest rates, deferments, and flexible repayment plans that include income contingent repayment plans and loan forgiveness. To give private student loan debtors more equitable treatment during bankruptcy, some legislators are considering drawing up new bankruptcy rules for these types of student loan debt .

The article said:

“Rep. Steve Cohen (D-Tenn.), chair of the House Judiciary Subcommittee on Commercial and Administrative Law, held a hearing to initiate legislation reversing a 2005 change in federal bankruptcy law that, he said, gave private student loan lenders a “favorable, unusual” advantage over borrowers, as well as in comparison to the issuers of most other kinds of consumer loans. “Hopefully it’ll be bipartisan and if not, you know, we’ll just have to forge ahead and do what’s right.” After the hearing, he formally announced plans to file legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.”

Legislators are also considering creating a firm definition of “undue hardship” so that it will be easier to decide whether a student loan should be discharged in bankruptcy or not.   Many legislators and private lenders opposing any changes to bankruptcy laws allow equitable treatment student loan borrowers during bankruptcy claim that hordes of student loan borrowers would discharge their loans if given the chance.  However, a 1970s study by the Government Accountability Office found that less than 1 percent of all matured student loans had been discharged in bankruptcy.