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Proposed Bill Would Allow Discharge of Private Student-Loan Debt During Bankruptcy

bankruptcy-courtSenator Richard Durbin of Illinois took to task the private student-loan industry on Tuesday, calling for a new bill that would allow educational debts to be discharged during bankruptcy filing. According to research conducted by the Federal Reserve Bank of New York, Americans owe approximately $870 billion in student loans, a figure which surpasses even the amount of outstanding auto loans or credit-card debt. The study also noted that more than a quarter of borrowers had past-due balances, a figure higher than previously reported, and nearly 5% of this population consisted of Americans 60 years and older.

Consumers Unable to Escape Student Loans, Even in Bankruptcy

“It is clear that too many students have been steered into loans that they will not be able to repay and that they will never be able to escape,” said Durbin during a Senate judiciary subcommittee hearing on Tuesday. The proposed legislation would permit private student-loan debt to be discharged in bankruptcy, although federal student loans would still not be eligible for discharge. “The student debt crisis in this country is largely ignored by Congress,” Durbin said. “There are a lot of lives that are being changed.”

A major concern for lawmakers is the high rate of default on loans by students at private institutions, many of them for-profit schools. Recent data shows that about 15% of students who attended for-profit colleges defaulted on their loans in 2009, which is more than double the rate at public colleges. Missteps like these can come back to haunt borrowers for years to come, because, while credit-card balances and mortgages can be cleared away, consumers are unable to discharge student-loan debt if they file for bankruptcy.

The Long-Term Cost of Student Loans

Some believe the legislation proposed by Durbin doesn’t reach far enough. Deanne Loonin, a lawyer with the National Consumer Law Center, believes all student loans should be able to be discharged in bankruptcy. According to Loonin, she works with consumers in their 80s whose Social Security checks are being garnished to pay for past student loans. “The government can come after people forever – until they die,” Loonin said.

On July 1, a five-year reduction in the interest rate for new federally-subsidized Stafford loans will expire, doubling the rate from 4.3% to 6.8%. Lawmakers have introduced a bill that would keep the rate at its current level, raising concerns about an interest rate increase costing some students as much as $5,000 over 10 years. President Obama has proposed extending the lower interest rate through 2013, which the Congressional Budget Office estimates would cost taxpayers about $6 billion.

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