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How Student Loan Debt is Treated Differently Than Other Debt

Current law makes student debt extremely difficult to escape.
 
 
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Current law treats student loans as non-dischargeable debt. In other words, no matter how broke a borrower gets, even declaring bankruptcy isn't going to get you out of paying back your student loans. 

That's why earlier this month, Rep. Steve Cohen (D-Tenn.) and Rep. Danny Davis (D-Ill.) re-introduced H.R. 532. This bill is a counterpart to legislation introduced in the Senate in January that would allow borrowers of private student loans to discharge them in bankruptcy.

"People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin,” Cohen said in a press release. "Our bill is a modest but important step in achieving that goal."

The Consumer Financial Protection Bureau estimates there's about $150 billion in outstanding private student loan debt in addition to the $864 billion in federal loans. Before the 1970s, all student loans could be discharged in bankruptcy along with credit card and auto debt. But a law passed in 1976 changed this regulation for federal loans, placing student debt in a category of items that can't be discharged, including back taxes and child support payments. In 2005, Congress extended this law to private loans. 

Compounding the issue for private loans: unlike their federal counterpart, there isn't an interest-rate cap (though the federal rates have been hotly debated as well recently). Bloomberg News reported last year that some J.P. Morgan loans topped at 10.25 percent interest.

Due to a slack definition in the law, debtors are still  allowed to discharge student loans in bankruptcy—that is, if they can prove paying back the loans would cause "undue hardship" to themselves or their dependents. Without a clear definition of "undue hardship," courts are left to define it. While it's possible for a court to rule in favor of discharging student debt, the process is difficult. The New York Times  reported one attorney recently spent 650 pro bono hours trying to discharge one person's student loan debt.

H.R. 532 would revert the bankruptcy law for private student debt to pre-2005 terms, allowing private loans to be discharged in bankruptcy proceedings without the burden of providing "undue hardship."

Cohen and Davis' bill marks the  fifth attempt in recent years to reform bankruptcy law surrounding private student loans. The  same bill introduced this month failed to win passage out of the House Judiciary Committee in the previous congressional session.

"Education often brings economic rewards, but not in all cases," Deanne Loonin, staff attorney at the National Consumer Law Center, told Campus Progress. "Some borrowers choose to work in careers that are less lucrative and often for the public good. Others run into unexpected life traumas that lead to financial trauma. Still others attend fraudulent schools...Treating student loans different in bankruptcy is based on the false assumption that higher education always leads to financial success."

Zach Duffy a reporter for Campus Progress.

 
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