BANKRUPTCY UPDATES

• Minnesota Distillery of Fine Vodkas Files Chapter 7 Bankruptcy (February 10, 2012)
• Court Approves Newspaper Magnate Lee Enterprises’ Bankruptcy Plan (February 07, 2012)
• Suspected Felon Filed for Bankruptcy Shortly Before Untimely Death (February 09, 2012)
• Ireland Overhauls Bankruptcy Laws (February 06, 2012)
• IL State Representative Files for Chapter 13 Bankruptcy (February 08, 2012)

Student Loan Reform May Decrease Student Debt

House Bill Would Eliminate Private Lenders

Student loans are notorious for being difficult to discharge in bankruptcy.

Aside from a few dire exceptions, most recipients are required to continuing paying their student loan debts even after filing bankruptcy.

College students may graduate with less debt under a bill passed by the House of Representatives in September that would put an end to the private lending industry.

The Student Aid and Fiscal Responsibility Act

The bill, Student Aid and Fiscal Responsibility Act (SAFRA), has been moved to the Senate for debate, and, if passed, is expected to be signed by President Obama.

The language in the bill would have all student loans originate from the federal government starting July 1, 2010, completely eliminating private lenders and banks from the equation. Currently, college students have their choice of two types of loans (in addition to grants and scholarships) to help them finance higher education: federal loans and private loans.

The federal government pays fees to private banks for making the loans available, and potentially affordable. By eliminating the private loan option, $87 billion could be saved in the next decade, or used to fund grants and education development.

Pell grants are awarded to students from low-income families, and may receive a significant boost from the money that is saved from subsidized loans.

While the legislation would not have an effect on the way student loans are handled in bankruptcy filings, it could affect how much debt future graduates are burdened with as they enter the job market.

Federal vs. Private Student Loans

Federal Stafford loans offer several advantages over private loans, such as lower interest rates that are locked-in; eligibility that is not based on credit; standard 10-year repayment plan (versus 20 for some private lenders); and maximum annual borrowed amount legislated by Congress (to regulate excess debt).

Under the proposed law, interest rates for federal loans would be variable, as they are now with private loans, but interest rates would be tied to the rate set by the U.S. Treasury, and would not go above 6.8%.

By making grants more available and offering better terms on loans, the government hopes to make higher education more affordable for a greater percentage of students.

According to some studies, the average college undergraduate enters the working world with $20,000 in debt.

In today's economy, some are unable to find full-time employment within the six-month grace period afforded by most lenders. Many make important life decisions—whether to relocate, buy a house or have a child—based upon their student loan payments.