Oakland Bankruptcy Attorney offers insight into bill before Congress that will change the way student loans are handled in bankruptcy filings.
Oakland Bankruptcy Attorney offers insight into bill before Congress that will change the way student loans are handled in bankruptcy filings.
In a Chapter 7 or Chapter 13 bankruptcy filing, federal student loans cannot be discharged as part of the bankruptcy settlement process. The 2005 bankruptcy reform law also gave that same protection to virtually all private student loans which typically do not have the favorable terms that federally guaranteed loans carry such as low fixed interest rates, flexible payment plans and other consumer protections. Private student loans often carry higher, adjustable interest rates and offer less payment flexibility than many consumer loans.
Rep. Steve Cohen (D-Tenn) is offering legislation that will remove the special bankruptcy protection that the private loans were given because it gave private student loan lenders a “favorable, unusual” over borrowers, especially when compared to other types of consumer loans.
There have been numerous news stories about the onerous terms that many private student loans carry. These loans can quickly more than double the original loan amounts when interest and penalties for late payments or underpayment kick in, leaving students overwhelmed with debt that they have no hope of repaying.
President Obama is advancing legislation that would remove private banks from the student loan business entirely, and have all of the student loans be issued directly from the federal government. The Student Aid and Financial Responsibility Act, passed by the House of Representatives and currently before the Senate, would start that process beginning next year.
The good news for students is that the loans will carry more favorable terms than the private loans that some have used to cover the difference between the financial aid packages and tuition costs. The loans will still not be eligible for discharge in bankruptcy, but the costs of the loans will be lower.
Rethinking Bankruptcy and Student Loans, Inside Higher Ed, September 24, 2009
Students tell Franken of financial woes, Morris SunTribune, October 12, 2009
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