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Should bankruptcy be an option for student loan debt relief?

On Behalf of | Mar 31, 2016 | Personal Bankruptcy |

This question seems to be gaining some traction in political circles. With nearly $1.5 trillion dollars in student loan debt across the country, some sources say that something needs to be done before another nationwide economic crisis occurs. Re-instituting bankruptcy as a way for financially struggling college graduates to obtain student loan debt relief could help remove at least some of the pressure that students here in New Jersey and around the country feel when they are unable to repay their loans.

Currently, it is nearly impossible to discharge student loans in a bankruptcy. However, it did not always used to be that way. Congress passed legislation restricting the discharge of student loans based on a belief that once students graduated, they were filing bankruptcy in order to avoid repaying their loans. In hindsight, it has been revealed that only around one percent of graduates were actually doing that.

The law created an atmosphere in which student loan lenders have nearly unlimited power to collect on debts with little regard for how it affects the borrowers. Between 25 and 50 percent of borrowers default on their student loans — this opens them up to garnishments, lawsuits and harassment from their lenders. Even if borrowers are able to get current on their loans and come out of default, there is a 60 percent change that they will default again.

There are more than likely many people who were forced into bankruptcy by their student loan debt, but not because they could be freed from it. Instead, borrowers may file bankruptcy in order to discharge other debts so as to have the income to pay their student loan obligations. Most New Jersey college graduates would agree that a good faith effort needs to be made to repay the debt, but when a person’s financial situation becomes dire due to student loans — at least in part — filing for bankruptcy is a way to obtain a fresh start financially.

Source: fredericksburg.com, “Column: College students deserve a right to debt relief“, Alan Collinge, March 20, 2016

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