• 12
  • December
    2012

It is not new news that student loan debt is a tremendous burden on recent graduates. With the dismal job market and downward economy many graduates cannot even come close to paying back their student loans.

In 2010, student loan debt exceeded outstanding credit card debt for the first time in history. Total outstanding student loan debt, exceeded $1 trillion in 2012.

In 2005, Congress prohibited private student debt from being discharged through bankruptcy, except in rare cases. Prior to 2005, private student loans were only dischargeable after a set amount of time, such as 5 to 7 years after the loan began to be repaid. Government student loans have not been subject to bankruptcy protection since 1976, when Congress exempted them following reports that new doctors and lawyers were filing for bankruptcy to avoid paying student loans. 

Congress has considered two possible resolutions to this ever-increasing student loan problem: making them dischargeable in bankruptcy or forgiving the loans altogether. 

Senator Dick Durbin (D-Ill.) has proposed the idea of restoring bankruptcy protection for borrowers of private student loans several times, but it has gone nowhere. Making the loans dischargeable through bankruptcy would have certain limitations, similar to those prior to the 2005 Bankruptcy Code Amendments, requiring the loans to be in repayment for a certain amount of time before they were eligible for discharge. Also, making student loans dischargeable would prevent graduates from obtaining assets with equity such as owning a house or new car or large bank account, as they would be disqualified from bankruptcy eligibility.

Earlier this year, U.S. Representative Hansen Clarke (D-Mich.) introduced H.R. 4170, the Student Loan Forgiveness Act of 2012.

The Act would allow students to pay just 10 percent of their discretionary income for 10 years; the remaining debt would be canceled. In addition, a 3.4 percent cap on undergraduate student loan interest rates would be put place. Private borrowers whose educational loan debt exceeded their income would be allowed to convert their private loan debt into federal Direct Loans, and their loans would fall under the purview of the Act.

The Public Service Loan Forgiveness (which was part of College Cost Reduction and Access Act of 2007) allows graduates to have their loans forgiven if they work in public service for ten years.