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New report calls for student loans to be discharged in bankruptcy

Bankruptcy is a powerful tool that allows people in debt to discharge their financial obligations and start again with a clean slate. For thousands of consumers, it is the only option for those who are unable to get out from under high levels of credit card debt or insurmountable medical bills.

Yet, there is one type of debt that is conspicuously exempted from dismissal through bankruptcy - student loans.

Student loans cannot be discharged through Chapter 13 or Chapter 7 bankruptcy, but that hasn't always been the case. Student loans could always be eliminated in bankruptcy until the 1970's. It was discovered that students were abusing the system by accruing enormous amounts of debt and then declaring bankruptcy shortly after graduation. Subsequent regulations forced a five-year, then later, a seven-year waiting period before a graduate could declare bankruptcy. In 1998, all federal student loans were removed from the bankruptcy system. In 2005, even private loans were exempted, as well.

Now, only those who pass the very high bar of "undue hardship" can have their student loans discharged through bankruptcy. Yet, more students than ever are suffering under debt loads that seem impossible to overcome.

The Great Recession, coupled with higher-than-ever college tuitions, has led to an epidemic of student loans. Today, the average college student carries $26,000 in debt at the time of graduation, and unemployment rates among recent graduates are 40 to 50 percent higher than they were 35 years ago.

All in all, the total amount of student loan debt in this country tops $1 trillion, greater even than our credit card debt. Under such circumstances, a move to allow for the elimination of student loan debt through bankruptcy seems not only sensible, but nearly essential to allow this generation's graduates a way out from under their debt.

Source: The Street, "For All Our Good, Let Student Debtors Go Bankrupt" Laura Kiesel, Sep. 16, 2013

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