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Should Student Loan Debt Be Dischargeable in Bankruptcy?

Student debt is at an all-time high. For the first time ever, total outstanding student loan debt topped $1 trillion in 2011. In 2010 alone, American students took on more than $100 billion in debt to pay for their educations.

New Jersey student certainly aren’t immune from this problem. The average New Jersey undergrad carries nearly $24,000 in student loan debt.

Students are expected to start paying back this debt soon after they graduate. However, with unemployment still high, many students have a hard time finding enough work to make ends meet. Keeping up with large loan payments often means that there isn’t enough money to cover unexpected expenses like car repairs or medical bills. Sometimes even everyday living expenses are hard to manage.

For many people, these bills either go unpaid or get put on a credit card. It’s not hard to understand how bankruptcy could follow relatively quickly.

However, unlike most other forms of debt, student loans are rarely dischargeable in bankruptcy. Many New Jersey bankruptcy attorneys, along with their colleagues throughout the country, are saying that this needs to change.

The National Association of Consumer Bankruptcy Attorneys recently released a report that calls on Congress to eliminate some laws that make it nearly impossible to discharge student loan debt in bankruptcy. NACBA is focusing particularly hard on private student loans, since these loans often have higher interest and less-favorable terms than government-backed loans.

NACBA is worried, as are many economists, that student loan debt may be the next “bubble” to burst and tank the still-struggling U.S. economy. With so much debt, and so few jobs, experts predict that graduates will have trouble paying off student loans for a long time to come. Since the loans can usually not be discharged, many borrowers end up simply defaulting. Many more run into financial problems in other parts of their lives or put off buying a home or starting a family.

Both the U.S. House and Senate currently have bills before them that would give student loan borrowers more options in bankruptcy. It is still unclear at this point, though, whether those initiatives will gain much traction.

Source: Forbes, “Student Debt: The Next Financial Crisis?” Halah Touryalai, Feb. 8, 2012.

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