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Bankruptcy laws may be modified to allow student loan discharges

A major dilemma faces the government and the banking industry with respect to the $1.2 trillion in student loan debt that has riddled the country in the past several years. President Obama proposed that bankruptcy be brought back to allow for student debt forgiveness, presumably within a Chapter 7 framework. Such a change would be wonderful news to Pennsylvania citizens buried in debt and to those in other states. However, what will be the impact on the student loan industry, and how will such loans be originated going forward, are among the perplexing questions that are being raised?

The proposal is now being debated in Congress, with its status not yet revealed. It would be welcomed and desperately needed relief for the 40 million-plus holders of at least one student loan. But the proposal raises concerns over the future of the industry, and whether all student loans in the future should be government subsidized. With respect to private loans going forward, will the banks have to raise interest rates to cover for newly anticipated losses?

How will students be able to afford the even higher debt loads when they cannot handle the lower rates applicable now? These apparently unsolvable conflicts will focus the debate for the future. It has been suggested that the whole current process and procedure will have to be re-examined and reformulated. One fact that may be considered in constructing new rules for loans is that a significant percentage of student  loan recipients do not get their financial feet on the ground for upwards of 10 years after college.

In 2005, the new Bankruptcy Code brought in tougher provisions making it all but impossible to get a discharge of a student loan. The atmosphere was decidedly anti-consumer at that time, and the result was a bankruptcy process that shunned the discharge of most student loans. Instead of making the economy flow smoother, however, the massive unsecured debt accumulation developed into a drag on the economy, both here in Pennsylvania and nationwide.

Source: theglobaldispatch.com, "Student Loan Debts Still a Crippling Issue, But Bankruptcy May Be a Way Out", Lolita Di, June 25, 2015

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