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In depth: Ideas surfacing to solve the student loan debt crisis, P. 2

In the last post, this blog began an in-depth discussion on the mushrooming student loan debt problem. There is general agreement that the skyrocketing college debt load is a true problem in the United States, but little consensus exists on how to relieve the student loan debt problem.

Is bankruptcy reform an option?

Historically, student loans were not off the table in a bankruptcy case. The bankruptcy code generally offers American consumers with a legal, and constitutionally recognized, process for finding meaningful debt relief.

However, in 1998, Congress modified the bankruptcy code to make it nearly impossible to discharge federally backed student loans in bankruptcy. The 1998 change created a small exception in cases of "undue hardship," but the exception is extremely small and it is rare for a debtor to qualify. In 2005, the bankruptcy code went through reform, and private student loans were added to the nearly impossible to meet standards for discharging student loan debt.

Bills have been introduced in both houses of Congress that seek to modify the bankruptcy code to allow for, at least some, relief from student loan debt in bankruptcy. A U.S. House measure has been proposed that would eliminate the 2005 change taking private student loans out of those types of debts that can be discharged in a bankruptcy proceeding. A similar bill has also been introduced in the Senate.

Critics of the idea say that reforming bankruptcy laws to allow for the discharge would make private loans to new students more expensive and reduce availability of new private student loans. Sallie Mae, the largest lender in the student loan market, is not so sure that modifying the bankruptcy code is a bad idea.

The agency favors some changes in the bankruptcy laws for both private and federal loans, but only if borrowers show a good-faith effort to repay the loans for at least five to seven years before qualifying for a discharge. Congressional gridlock has blocked any movement in reforming the bankruptcy code to provide relief for student loan borrowers.

A number of other ideas have arising recently. In the next post, this blog will conclude the in-depth discussion of proposals to relieve the student loan bubble.

Source: USA Today, "Five proposals to solve $1 trillion college loan crisis," Sandra Block and Christine Dugas, May 21, 2012

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