There’s some more good news coming out of Congress (if you can believe that). A few weeks ago, Congressman Hansen Clarke introduced the Student Loan Forgiveness Act of 2012 which, if passed, would help millions of student loan borrowers better manage their federal and private student loans. Now, Senator Richard Durbin (D-IL) has introduced a bill to reform the bankruptcy laws for student loan borrowers.
First, some background. Until fairly recently, student loans were very much like other forms of consumer debt (such as credit card debt, auto loans, medical bills, etc) in that they could be discharged through the bankruptcy process. Then, in 2005, Congress and President Bush passed a law that completely changed how bankruptcy laws are applied to student loans. This law made it exceedingly difficult to discharge student debt through bankruptcy, outside of exceptional circumstances. The practical impact of this legal change is that if you can’t pay them off, your student loans (particularly private student loans) may haunt you forever. The 2005 law arguably made student loans (which are supposed to be “good” debt, an “investment” in your future) the worst type of debt you can have.
Senator Durbin’s bill, if passed, could change that. It would restore bankruptcy protections for private student loans (although federal student loans would remain without bankruptcy protections). This would allow borrowers to use the bankruptcy process to discharge private student loans. Of course, like any other legislation right now, it’s anyone’s guess whether such a law could pass in our hyper-political gridlocked Congress.
To read more about the bill, click here.