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Congress Proposes Allowing Private Student Loans to be Discharged in Bankruptcy

Congress Proposes Allowing Private Student Loans to be Discharged in Bankruptcy

Mark Kantrowitz

April 22, 2010

Refinement of Past Proposals

Past attempts to repeal the exception to discharge for private student loans have failed because members of Congress were unwilling to reopen the US Bankruptcy Code. The current proposal represents a refinement of past proposals.

  • On February 7, 2008, an amendment to the Higher Education Opportunity Act of 2008 (P.L. 110-315) proposed by Rep. Danny K. Davis failed by a vote of 179 to 236, with 170 Democrats and 9 Republicans voting in favor and 52 Democrats and 184 Republicans voting against. This amendment would have allowed private student loans to be discharged after 5 years in repayment. It would also have closed a loophole whereby mere association of a for-profit loan program with a non-profit entity made a private student loan non-dischargeable even though the non-profit entity was not the source of funding for the loans.

  • On June 7, 2007, Senator Durbin introduced a bill, S.1561, to repeal the exceptions to discharge for private student loans. The bill was referred to the Committee on the Judiciary and was never reported out of committee.
  • On May 26, 2006, Senator Clinton introduced the Student Borrower Bill of Rights Act of 2006 (S.3255). She reintroduced it on February 7, 2007, as the Student Borrower Bill of Rights Act of 2007 (S.511). Among other provisions, the bill would have allowed new federal and private student loans to be discharged after 7 years in repayment. The bill was referred to the Committee on Health, Education, Labor and Pensions and was never reported out of committee.

This time Congress seems more willing to restore borrower protections to private student loans.

Text of the Senate Amendment

523(a) Exceptions to discharge

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for — (A) (i)an educational benefit ov erpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received from a governmental unit as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Text of the House Amendment

523(a) Exceptions to discharge

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for — (A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or any program for which substantially all of the funds are provided by a nonprofit institution; or (B) (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Related Resources

For additional information about discharging student loans in bankruptcy, see Bankruptcy and Financial Aid and Student Loan Bankruptcy Exception on the FinAid site.

Mark Kantrowitz is a nationally-recognized expert on student financial aid, student loans, scholarships and paying for college.


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