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Lawmaker Wants To Make Student Loans Dischargeable

Posted on in Bankruptcy

To help combat a rising tide of student loan debt, a Maryland Democrat has introduced a bill to make these obligations dischargeable in bankruptcy.

Representative John Delaney, who has held the seat since 2013, introduced the Discharge Student Loans in Bankruptcy Act in mid-January 2015. According to Rep. Delaney, that bill would place student loans on par with mortgage debt, credit card debt, medical bills and other dischargeable obligations. This bill is the latest in a series of measures designed to address the student loan crisis. In the previous Congress, lawmakers placed restrictions on student loan interest rate hikes and required educational institutions to be more transparent about tuition and fees.

According to a recent study, nearly seven in 10 2013 graduates carried burdensome student loan debt.

Student Loans and Bankruptcy

Until the 1970s, student loans were treated the same way as other unsecured loans. The obligation to repay the debt was dischargeable in bankruptcy, although there could be other consequences for nonpayment, such as withholding a transcript or an ineligibility for future government loans.

For reasons that are not entirely clear, perhaps due to a perception that 1960s student radicals went to college on the government's dime and then refused to pay, Congress began changing the rules. In 1976, lawmakers eliminated the discharge for loans that were less than five years old. Other restrictions followed in 1978, 1979 and 1984. Then, the hammer fell.

A 1987 case from the Second Circuit Court of Appeals in New York spawned the so-called Brunner Rule. This rule made it nearly impossible to discharge most student loans unless the debtor was disabled, or there was some other extraordinary circumstance. Specifically, student loan debt could be forgiven only if:

  • The debtor had made a good faith effort to repay the loan;
  • Continued repayment would be a financial hardship; and
  • The condition was expected to last through the entire repayment term.

Congress closed the final loophole in 2005, and all student loans were effectively non-dischargeable. But times may be changing. While you should definitely keep trying your best to repay your student loans, look for additional student debt relief legislation in the coming months.

If you have more debts than you can repay, call the experienced Arlington Heights bankruptcy attorneys at Newland & Newland, LLP for a free phone consultation. We have offices throughout northern Illinois.

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