This week the White House announced a new Student Aid Bill of Rights, which aims to help federal student loan debtors with better options and more clarity in dealing with their problem student loans.
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While most of the new initiatives announced are geared toward eliminating unnecessary payment hurdles and make dealing with federal student loan repayment options easier, one section points to an important shift in government policy.
Many people continue to suffer under the misunderstanding that student loans can’t be discharged in a consumer bankruptcy. While student loans might currently be onerous to discharge in bankruptcy, some are very easy to eliminate. Take for example, these private student loans.
For the past couple of years I’ve been studying the elimination of student loans in bankruptcy. What is surprising to people I share this information with is that both federal and private loans have been and continue to be discharged by skilled bankruptcy attorneys who understand this shifting landscape.
The reality about discharge was first studied by Jason Iuliano, a Harvard trained lawyer. Iuliano discovered the reality of student loan discharge in bankruptcy was that four out of 10 who attempted to discharge their loans were successful.
Granted, a 40% rate is not success for the majority, but it’s not inconsequential either. More disturbingly, he found that in just the one study year, 69,000 debtors would have been good candidates to receive some or full relief from their student loan debt but they never even tried to discharge the loans. In fact, few ever try to discharge their student loans in bankruptcy. “99.9% of student loan debtors in bankruptcy never attempt to get a discharge,” says Iuliano.
The vast majority of bankruptcy attorneys continue to tell consumers a discharge is just not possible. One reason is the tough go the federal government and student loan lenders have given attorneys in the past. Student loan defendants have been forced some debtors and attorneys to enter expensive litigation to prove the loans create an undue hardship and should be legally eliminated in bankruptcy.
But in the Student Aid Bill of Rights announced this week, one section in particular points to the government making it easier for struggling students to eliminate their debts in bankruptcy.
Section 3(b) says, “By July 1, 2015, the Secretary of Education shall issue information highlighting factors the courts have used in their determination of undue hardship, to assist parties who must determine whether to contest an undue hardship discharge in bankruptcy of a Federal student loan.”
One way to read this might be the government desires to make a discharge more difficult but buried in the same Bill of Rights is another section where the government wants to provide additional protections for student loan borrowers: “After assessing the potential applicability of consumer protections in the mortgage and credit card markets to student loans, recommendations for statutory or regulatory changes in this area, including, where appropriate, strong servicing standards, flexible repayment opportunities for all student loan borrowers, and changes to bankruptcy laws.”
It clearly appears to me the government is signaling coming clarity to make the undue hardship discharge of federal student loans easier through a unified set of guidelines that bankruptcy attorneys and courts will be able to use to make the elimination of federal student loans a swift and affordable process.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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A contributor for Credit.com, Steve Rhode is an experienced and respected consumer debt expert that helps people for free with tips and advice on how to get out of debt through his site at GetOutOfDebt.org. More by Steve Rhode