A new law to make private student loans eligible for discharge in a bankruptcy is being debated by the U.S. Congress. It is stands right now, no student loans — neither federal nor private — can be discharged in a bankruptcy.
Unlike home loans, car loans and credit card debt, so-called “education loans” are exempt from bankruptcy laws. But private student loans, which typically have less flexible terms and higher interest rates then federal student loans, are the source of trouble for many college grads.
In actuality, private student loans haven’t always been treated the same as federal student loans. In fact, until five years ago, they could be discharged just like other privately issued debt in the event of a bankruptcy. Then a change in bankruptcy laws gave private student loans “protected” status.
Federal student loans, which historically have provided the lowest interest rates, most flexible repayment terms (including the new income based repayment plan), and other hardship options, would continue to be protected from bankrupting. Holders in default on the federal student loans can also have their wages and tax returns garnished.
For more on the new proposed private student loan bankruptcy law, check out this comprehensive coverage from NextStudent.com.