Student Debtor’s Situation Precarious in Sacramento Area with Regard to Student Loan Overhaul and Newly Proposed Bankruptcy Legislation

President Obama signed sweeping legislation affecting thousands of college students along with the acclaimed health-care bill on March 30, 2010. This overhaul changes the way students will finance their higher education. Obama’s higher education overhaul encourages individuals seeking to borrow money to pay tuition and education related expenses to take the loans directly from the federal government instead of private lenders. The law also caps a graduate’s repayments of the loans to 10 percent of their salary, which currently stands at 15 percent. Designed to save the federal government $68 Billion dollars and streamline the entire lending process, students may nonetheless find themselves in the exact same situation as they do now if they cannot afford to pay their loans: STUCK.

Current bankruptcy laws allow a student to discharge his or her student loans only if he or she can show that paying the loan constitutes an “undue hardship.” The definition of “undue hardship” remains vague to most courts and has been applied to debtors inconsistently. Regardless, “undue hardship” continues to be a high standard for a student debtor to prove in bankruptcy court. Basically, this means for a student debtor to ensure that his or her student loans would be discharged through bankruptcy he or she would have to prove that she has no way of producing income; a difficult standard to achieve.

Legislation proposed this month, in the U.S. House of Representatives, seeks to alter the bankruptcy code and permit individuals to include private student loans with his or her Chapter 7 filing by having the private loan stripped off along with credit-card balances, gambling debts, and mortgages. According to Andrea Fuller’s article, Lawmakers Introduce Bills to Change Student-Loans Bankruptcy Policy, this new bill seeks to eliminate the “undue hardship” standard for private student loans. Surprisingly, however, the legislation remains completely silent with regard to a debtor’s inclusion of student loans in the bankruptcy that have been provided by the federal government.

While some may applaud this legislation’s attempt to help college graduates who are forced into filing bankruptcy get a “fresh start,” this assistance will be short lived and only affect a limited number of people. The problem is this: Obamas “student loan overhaul” seeks to turn the student loan industry into one overseen by the federal government and eliminate privately issued student loans entirely. Since this legislation remains silent with regard to the inclusion of the loans provided by the federal government, the debtor will be in the exact same position he finds himself in today: the student loan will not be removed through bankruptcy unless the debtor can show “undue hardship.” In other words, if all student loans will be provided by the federal government but an individual can only include a private student loan in a bankruptcy filing, then this legislation will have little if any impact on future students.

A debtor’s loan circumstances and timing with regard to filing the bankruptcy will become of utmost importance if this new legislation becomes law. No doubt the current state of the law and an extensive evaluation of the type and nature of student loans that a debtor seeks to discharge must be taken into account. Those residents with student loans who have considered filing Chapter 7 should consult with a Sacramento bankruptcy attorney who is knowledgeable on the subject.