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Student loan debt and a fresh start - are they compatible?

For some of our Escondido readers, the fact that the politicians in Washington, D.C., are trying to figure out the country's fiscal future can be somewhat frightening. California residents are all too familiar with the way some public officials handle monetary affairs, and the nation could be facing an even bigger challenge in the coming years - student loan debt.

As the bankruptcy code stands right now, student loan debt, in the vast majority of cases, cannot be discharged through a personal bankruptcy filing. Those individuals looking for a fresh start to their financial situations by filing for Chapter 7 bankruptcy will, for now, have to look elsewhere when it comes to dealing with student loan debt. However, there are some out there who are calling for a change. Certain advocates say that some student loans actually should be included in the bankruptcy process - private student loans.

The overwhelming majority of student loans are government loans. However, there are many people who are carrying student loans from private institutions - most times at a higher interest rate. There is also basically no cap for a private institution to lend to a student, which is not the case with government loans. With student loans unable to be discharged through bankruptcy, private institutions really have no incentive to stop loaning to an applicant, because they are almost guaranteed to get their money back.

However, those who advocate for a change to the bankruptcy code point out that allowing private student loan debt to be discharged would make these private institutions more cautious about loaning money. This, in turn, would be a step in the right direction for reigning in student loan debt burdens overall, if there is less of an incentive to loan.

All in all, almost any kind of debt can seem like an incredibly unmanageable burden. For those Escondido residents who find themselves in this type of situation, considering the benefits of a bankruptcy filing may be a good idea.

Source: Inside Higher Ed, "Bankruptcy, Not Forgiveness, for Student Loans," Jenna Ashley Robinson, Dec. 7, 2012

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