Are Private Student Loans About to be Eligible for a Discharge in Bankruptcy?

The answer is maybe. If you are struggling with large student loan balances, you’re not alone. The Consumer Finance Protection Bureau estimates that approximately 40 million Americans owe student loans with the average debt owed totaling $29,000.00. And many student loan borrowers owe balances much more than the average. Student loan debt affects not only the student borrowers but also parents, grandparents, and others who may have incurred this type of debt to help a student or who may have co-signed to assist a student borrower.

Two Types of Student Loan Debt

Generally speaking, there are two types of student loan debt. The first type of student loan debt is that which is guaranteed or originated by the federal government – the so-called “federal” student loan. The second type of student loan debt is originated by a private lender and is dubbed the “private” student loan.  Under current law, both types of student loan debt are not subject to a discharge in a bankruptcy case except in very limited and rarely applicable circumstances. So, while it is possible to eliminate many types of debt through a bankruptcy case, e.g., credit card debt or medical debt, it is not currently possible to eliminate student loan debt. The student loan debt remains intact after the conclusion of the bankruptcy case. And depending on the circumstances, the remaining student loan debt can be a substantial impediment to the “fresh start” that bankruptcy is supposed to provide.

Private Student Loan Debt

Private student loan debt can be particularly problematic because, unlike its federal counterpart, there are no rules providing for income driven repayment plans. Generally speaking, these plans allow federal student loan borrowers to base the repayment of their federal student loans on their income and ability to pay. But these important protections do not exist for the private student loan borrower. The private borrower is at the mercy of lender who made the loan and the terms of the loan.

There is an effort underway to help ease the burden of private student loan debt. Senator Richard Durbin of Illinois, along with 12 other senators, has introduced a bill in the U. S. Senate which would allow private student loans to be discharged or adjusted in a bankruptcy case. If the bill ultimately becomes law, private student loans would be subject to discharge in bankruptcy as they have been in the past. This would mean that private student loan borrowers who truly cannot afford to repay these loans would get the relief that they need. Federal student loans are not affected in this bill and would remain non-dischargeable in a bankruptcy case.

Hopefully, this bill will ultimately become law. In the meantime, if you are struggling with student loan debt, federal or private, bankruptcy can still be a viable option for you. A consultation with a reputable and competent consumer bankruptcy attorney can help you make this determination. Our attorneys will meet with you in a private, no cost initial consultation to discuss your entire financial situation with you. This is the best way to determine if filing a bankruptcy case is truly the right option for you to deal with your student loan or other debts.