Congress Considers Proposals To Let Private Student Loans Be Discharged In Bankruptcy

Sen. Dick Durbin (D-Ill.) thinks Congress should change the law to allow borrowers to have their debt from private student loans wiped clean when filing bankruptcy.

On March 20, a Senate judiciary subcommittee heard testimony about student debt and bankruptcy. Federal student loans have been ineligible for discharge when filing bankruptcy for two decades. However, it was only in 2005 that a law was passed to ban private student loans from bankruptcy discharge.

"There is no reason why private student loans should get treated differently from other private debt in bankruptcy," Durbin said in remarks at the hearing . "And it is especially egregious that these private loans are non-dischargeable in cases where a student was steered into the loan while the student was eligible for safer federal loans."

Durbin also said the 2005 provision to make private student loans ineligible for bankruptcy discharge is "a mystery amendment. We cant find out who offered it."

Deanne Loonin, an attorney for the National Consumer Law Center, testified that the law was passed assuming there would be abuse by borrowers.

"Current bankruptcy law treats students who face financial distress the same severe way as people who are trying to discharge child support debts, alimony, overdue taxes and criminal fines," Loonin said in her testimony. "Yet there is no evidence and has never been any evidence to support this assumption."

Durbin introduced legislation in 2011 to allow private student loans to be eligible for discharge in bankruptcy.

The argument against it, is that when having a $20,000 loan from a private lender for a car being discharged in bankruptcy, the car could be confiscated. Yet, discharging $20,000 in student debt does not allow anyone to take away a borrower's education. Other observers note that student loans operate in a very different way than credit card debt.

"The initial loan balances are much larger than they are with cards, for starters," writes Thomas K. Brown on the blog iStockanalyst . "And the borrower doesn't begin to repay them until he's earned his degree, four years hence. The lender thus has no idea which of its credits are good and which are bad until it has already loaned them, in many cases, tens of thousands of dollars."

Student loan debt is a significant issue nationwide, so what else is Congress doing about it? Take a look at 8 ways they are grappling with the problem:

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