For many Americans, repaying student loans is incredibly difficult, and may even lead to bankruptcy as it is extremely difficult to make high student loan payments and pay other debts regularly. The Obama administration has recently called for private student loan borrowers to be given an opportunity to relinquish responsibility for their loans in a bankruptcy proceeding. The proposal prompts Congress to revisit a 2005 law which makes discharging student loans in a bankruptcy viable only under strict conditions.
Government backs plan for first time
This announcement represents the first time that the Obama administration has backed the argument that private student loans should be dischargeable in bankruptcy. Secretary of Education Ted Mitchell comments on the new position of the government by saying,
“All other types of consumer debt are dischargeable in bankruptcy, and we think private student loans are a glaring exception. We feel strongly that while there are protections built into the [federal] direct loan program that are important for borrowers, there aren’t parallel protections for borrowers in the private student loan market.”
It is important to note that the proposed plan will not make bankruptcy viable across the board, but rather only for those students paying back private loans that do not offer flexible payment plans. In regards to federal student loans, the government has stated firmly that the standards should not be changed because they already have lenient terms and protections.
If the administration has its way, the new regulations may be beneficial for both lenders and borrowers. Students may choose more affordable options or seek out scholarships if they are not given such easy access to perceived “easy” money in the form of private student loans. Private lenders, on the same note, will also think more carefully about who they approve the loans for, since they will assume a greater risk of failure. Regardless, it will be exciting to see how this legislation plays out, as the issue of private student loans and bankruptcy has been a hot topic for some time.
If you find yourself embroiled in a bankruptcy situation, Kelley & Fulton can certainly help. We invite you to schedule an appointment with an experienced bankruptcy attorney in West Palm Beach and let us devise the best course of action for you moving forward.