Currently, Americans owe more than 1.2 trillion dollars in student loans.  This exceeds all other categories of consumer debt, including credit cards and auto loans.  Some predict that this massive amount of student loan debt will be the next big crisis for our economy.

A private student loan is a student loan made by a private lender.  These loans are not federally guaranteed.  Private student loans, like all student loans, are nearly impossible to discharge in bankruptcy. 

This was not always the case.  Prior to 2005, private student loans could be discharged in bankruptcy.  That year, however, Congress  passed The Bankruptcy Abuse Prevention and Consumer Protection Act, also known as BAPCPA.  Under heavy lobbying from the banking industry, a provision was added to BAPCPA that treats private student loans the same way that federally guaranteed student loans are treated in bankruptcy. 

As the result of this change, to discharge a privately held student requires proof that paying the loan would be an undue hardship.  Unfortunately, the court’s interpretation of “undue hardship” has made it nearly impossible to discharge student loans in bankruptcy.  Consequently, private banks are able to make loans at any interest rate without having to worry about the borrowers being able to get out of the loans through bankruptcy.  The lenders have found this arrangement quite profitable.

Many think that this is a very unfair situation for those taking out student loans.  It’s bad enough that, for all practical purposes, federally guaranteed or direct federal student loans are not dischargeable, but at least they offer benefits, such as a lower interest rate.  However, privately made student loans don’t offer such benefits. Why should such private lenders get the benefit of having their loans, for all practical purposes, non-dischargeable in bankruptcy?

There is a glimmer of hope for those with private student loans.  Bills have been filed in the House and the Senate that would once again make private student loans dischargeable in bankruptcy without having to meet the undue hardship test.

With all of the money that is in politics and the staunch opposition of the banking industry lobby, passing this legislation is an uphill battle, at best.  I urge you to contact your members of Congress in the House and the Senate. Tell them that you want them to vote for these bills.

UPDATE:  As of today, October 30, 2015, there has been no movement on this issue in Congress.