Congress Considers Law to Make Private Student Loans Dischargeable in Bankruptcy

Under current bankruptcy law, most types of student loans are not dischargeable in bankruptcy.  Specifically, Section 523(a)(8) of the Code makes non-dischargeable:

an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Currently student loans would only be dischargeable if the debtor files an expensive “Adversary Proceeding” in bankruptcy court and successfully argues that repayment would present an “undue hardship.”  Statistically a finding of undue hardship has proven to be very, very difficult.

Recently, however, there comes word that Congress is considering a change in this law that would make some private student loans dischargeable.   San Francisco bankruptcy attorneys Jeena Cho and Jeff Curl report on their blog that H.R. 5043 entitled the Private Student Loan Bankruptcy Fairness Act, a bill co-sponsored by Tennessee representative Steve Cohen, is now making its way through Congress.

Why would Congress consider this change?  Perhaps this Congressional action arises from complaints from trade school students who get stuck with thousands and thousands of dollars of student loans, even when the trade school goes out of business or fails to provide the promised education.

As the bill’s sponsors note, private student loans are fundamentally different from government backed student loans.  Lenders issuing government backed loans must adhere to certain requirements – such as clearly disclosed fixed interest rates and limitations on “origination fees.”  Private student loans are not required to have any such limitations and borrowers frequently find themselves paying extremely high fees in exchange for limited benefit.   According to Rep. Cohen, permitting the discharge of private student loans would function as a form of needed consumer protection for borrowers.

The Private Student Loan Bankruptcy Fairness Act is not yet law, but it is encouraging to see Congress consider this legislation.