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Student Loans and Bankruptcy

Student debt in America recently crept above one trillion dollars, meaning that Americans now owe more on their student loans than they do on their credit cards. And the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) changed the rules so that no student loans — public or private — could be discharged in bankruptcy unless the borrower can prove that repaying the loan would cause undue hardship.  In practice, proving undue hardship sufficient to discharge student loans has proven nearly impossible. This puts student loans in the same category as child support and criminal fines, other types of debt you cannot discharge in bankruptcy.

But things may be changing, at least for future borrowers. There is a growing movement to make at least private student loans dischargeable in bankruptcy again. And in March 2012, Representative Hansen Clarke of Michigan introduced the Student Loan Forgiveness Act of 2012, which proposes that — at least for federal student loans — the amount of monthly repayment be scaled to your income. If, after 120 months (10 years) in repayment, you have not managed to repay your federal loans in full, the government forgives the outstanding balance.

In June, Congress approved legislation ensuring that federal student loan rates will not double — to 6.8 percent from 3.4 percent — for the next year. Because that amounted to only a temporary extension of the lower student loan rate, the topic of financing higher education and managing ballooning student debt, especially in a difficult job market, is shaping up to become a major campaign issue in the 2012 elections. So it is possible that indebted, struggling students and former students may finally see some positive legislative response to their plight.

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