Bankruptcy Law, Timothy Kingcade Posts

How Bankruptcy Could Help Solve the Student Loan Debt Crisis

Last week, President Obama introduced a proposal that would give colleges federal money based on performance and affordability to students. This so called ‘ratings system,’ Obama said would require accountability at colleges across the country in an effort to curb the escalating costs of student loans.

However, experts say there may be another more effective way to solve the student loan debt crisis: bankruptcy law. Under the current system, student loans are near impossible to get discharged through bankruptcy, unlike most other forms of unsecured debt, such as medical bills and credit card debt. Legal experts say this is creating a generation of Americans who are unable to get out from under the crushing weight of college debt and falling off the economic grid.

The Consumer Financial Protection Bureau found that total student loan debt is approaching $1.2 trillion, which would exceed credit card debt by more than 28 percent. According to a recent study done by the Center for American Progress, forty-five percent of all American families now have student loans.

With unemployment high among recent college grads, default rates on these student loans have risen as well. The economy is different today and college grads are leaving school with $50,000 to $100,000 in debt unable to find jobs. Experts say allowing college graduates to discharge their student loan debt in bankruptcy will allow them to have a ‘fresh start’ and return to being participants in the economy.

The ability to discharge student loans in bankruptcy has become increasingly difficult over the years to the point where now the borrower has to prove that any student loan, even a privately issued one, would cause an “undue hardship” to them in order to get it discharged. Another hurdle is that in order to discharge a student loan debt, a debtor must file a separate action and argue in front of the bankruptcy court, a process that usually requires an attorney and additional money.

Experts have proposed a number of fixes that would help out borrowers stuck under unmanageable debt burdens. One proposal discusses allowing all private loans to be dischargeable in bankruptcy. Another discusses loan forgiveness programs — in which a borrower repays an affordable amount over 20-25 years before getting the rest discharged. Another proposal allows bankruptcy courts to value a debtor’s student loan at its fair market value, which is what another investor would be willing to pay to buy the loan off the original lender, and discharge anything above that value. A similar process is currently available to some debtors on their mortgages in bankruptcy.

Experts on the topic still feel it is going to take a lot more than the President’s recent proposal and bankruptcy to fix the system. It’s really going to come down to looking at institutions, both for profit and nonprofit, who are doing innovative things to get students to graduation and employment.

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If you are in a financial crisis and are considering filing bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade & Garcia, P.A. has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade & Garcia website at