Will Congress change the law about discharging private student loans in bankruptcy?

Some representatives in Congress are still interested in a bill that would allow people to discharge private student loans in bankruptcy (the Private Student Loan Bankruptcy Fairness Act of 2013 (H.R. 532) ). This bill was introduced in 2013 but still has not become law.

Before 2005 in most cases you could wipe out private student loans with the bankruptcy file and discharge. This changed with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This law exempted private student loans from bankruptcy discharge similar to a federal student loan. So, if you file bankruptcy today you can only discharge a private student loan if you can show that repaying the loan would cause an undue hardship which is a difficult standard to meet.

There are a number of facts to support the argument that it is unfair to treat a private loan like a federal loan. For a federal student loan, credit history or ability to repay the loan, (with the exception of being barred from a federal PLUS loan if you have a adverse credit history), does not get taken into account. These factors also do not affect your interest rate with a federal student loan. However, a private student loan lender is similar to borrowing from a credit card company. They can decide whether to lend to you or not, if you have bad credit they can also charge you a very high interest rate.

There are a number of repayment plans that are available with a federal student loan that allow the borrower to stretch out the payments or reduce them, and wipe out in some cases the debt by working in certain fields as well as other options. However, with a private student loan you do not have these programs available. You can try to work something out with a lender, but in most cases you cannot force them to negotiate with you. The proposed new law would remove the special treatment that private student loans get in a bankruptcy filing and put them in the same position as other unsecured creditors. Unfortunately, the chances of the passing at least at this point do not seem high. However there may be reason to be somewhat hopeful as in March 2014 an additional five representatives in Congress joined as cosponsors which brought the total supporters to 39. Time will tell, but there may be hope after all.