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Move to discharge college loans in bankruptcy proceedings

Arizona residents facing financial difficulties are likely aware they may have the option of filing for personal bankruptcy, discharging most of their debts and beginning fresh. However, students with college loans do not have the same advantage; to date, student loans are not wiped out when filing Chapter 7, potentially leaving Americans even in their golden years to pay off student loans with their Social Security benefits.

Students at for-profit colleges have a particularly high rate of default, with 15 percent of students at these schools defaulting on their loans in 2009. With accumulating payments, 5 percent of all payments past due are those of Americans above 60 years of age.

College loans are proving to be the next debt bomb, according to news reports. Approximately $870 billion is owed in student loans across the country. This amount currently exceeds auto loans and credit card debt. Some lawmakers are starting to recognize these alarming figures by sponsoring legislation to tackle these hurdles.

Through legislation recently proposed in the U.S. Senate, bankruptcy would now also discharge private college loans. However, students would still be responsible for paying off their federal loan debt. According to supporters of the legislation in the National Consumer Law Center, the best solution would be to allow all student loans to be discharged.

Another change in college loan debt may arise when a five-year interest rate reduction in federal subsidized loans expires on July 1. The interest rate on Stafford Loans will double, from 3.4 percent to 6.8 percent.

Senators working to pass the bankruptcy law may attach it to another bill that would maintain the interest rate on student loans at the current level.

Source: Washington Post, "Durbin targets private student loan defaults," Ylan Q. Mui, March 20, 2012