- H.R. 2028 and S. 1102 amends federal bankruptcy code to remove qualified educational loans as an exception to discharge from bankruptcy.
- In August 2011 Congress eliminated the in-school interest subsidy for graduate-professional student loans which will have the effect of increasing the cost of student loans for students attending veterinary medical schools and other programs. This deleterious development coupled with ballooning graduating debt and a stagnant economy means that there will be a cohort of graduates who are unable to repay educational debt.
- Presently the law excludes private/commercial student loans from being discharged in bankruptcy. Bankruptcy should work as a safety net that allows people to get an education with the assurance that, should their finances be strained by layoffs, accidents or other unforeseen life events, they will be protected.
- Bankruptcy protection is important for borrowers of private/commercial student loans because these loans are ineligible for the repayment assistance, forgiveness, and relief programs that accompany federal student loans such as the Income-Based Repayment plan and the Public Service Loan Forgiveness program.
- As it stands, consumers may "rack up" tens of thousands in credit card debt or other consumer debt and then file for bankruptcy while college graduates who cannot repay private/commercial student loans do not have that option available to them. Bankruptcy filings will still appear on an individual's credit history for seven years; however the individual will be able to move forward with his/her life.
- Before changes were made to the bankruptcy code in 2005, only government issued or guaranteed student loans were protected during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education.
- This legislation would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005, so that privately issued student loans will once again be dischargeable in bankruptcy.
- H.R. 2028, sponsored by Rep. Steve Cohen, was introduced 5/26/11 and referred to House Committee on the Judiciary Subcommittee on Courts, Commercial and Administrative Law on 7/11/2011.
- S. 1102, sponsored by Sen. Dick Durbin, was introduced on 5/26/11 and referred to the Senate Judiciary Committee.
Gina Luke, Assistant Director, Governmental Relations Division, 202-289-3204.