History

• Before 2005, student loans guaranteed or issued by the federal government were not dischargable unless an undue hardship was shown. This rule had been in place since 1978, and was intended to protect the government's investment in higher education. Student loans from private institutions, on the other hand, were eligible for discharge regardless of hardship. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed this law. Now privately funded student loans are treated the same as government guaranteed or issued loans.
  
  

Fight to Change New Private Student Loan Bankruptcy Law

• In June 2007, Sen. Richard Durbin , D-Ill., introduced Senate Bill 1561. The intent of the bill was to change the new law back to the pre-2005 law that allowed the discharge of private student loan debt. The bill made it before the Judiciary Committee, but was never voted on in the Senate. Durbin tried again in 2008 to have the bill restructured with an amendment to the reauthorization of the Higher Education Act. The amendment would allow the discharge of private student loans after five years in bankruptcy. Although the measure was voted on, it was defeated in the House 236 to 179.
  
  

Effect of the New Law on Private Student Loans

• Because of the new law, it is more difficult for a debtor to have a privately funded student loan discharged in bankruptcy. In order to discharge a student loan, a debtor must file a separate action called a Complaint to Determine Dischargability. Most bankruptcy courts determine a debtor's undue hardship by looking at three factors: poverty; the persistent inability to pay the loan due to current and future economic conditions; and the good-faith effort to repay the loan.
  
  

Special Considerations on the West Coast

• Other courts, such as those on the West Coast, consider the totality of the circumstances when determining whether undue hardship exists. Federal courts in the 9th Circuit Court of Appeals, which includes courts in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, and Washington, typically consider the following circumstances regarding a debtor: income potential, education level, age or other factors that prevent relocation, assets, obligation to dependents, and whether the debtor or a dependent of the debtor has a serious mental or physical disability.
  
  

Special Considerations for HEAL Loans

• Student loan bankruptcy laws do not govern all student loans. The Health Education Assistance Loans Act governs HEAL loans. HEAL loans, which are no longer issued, were loans issued for graduate students in medicql fields. In order to discharge a HEAL loan it is necessary to show that the loan has been due for more than seven years and that the debtor will experience an "unconscionable burden" if forced to repay the loan.