Student loans and bankruptcy

Marketplace Contributor Sep 7, 2012
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Student loans and bankruptcy

Marketplace Contributor Sep 7, 2012
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As college costs rise, students are finding they have no choice but to take out loans — loans that are often shockingly high and which follow you to your grave. Ron Lieber wrote a story in the New York Times recently about the difficulties of discharging student debt.

“The reason why it’s made so much tougher for students than it is for other people is that they know that theoretically, students can walk away from the debt and yet still keep the degrees that they borrowed to acquire,” Lieber said.

In the 1970s, congressmen passed legislation to tighten standards for federal student loans, so the government and taxpayers are not taken advantage of. But they did add one loophole: If graduates can prove that paying back their student loans would cause “undue hardship” and that there is “a certainty of hopelessness” to their situation, they can get their loans dismissed. Unfortunately, the congressmen never defined what undue hardship meant.

A Princeton researcher Lieber spoke to pointed out that anyone who lives in a state with a lottery will fail to meet the “certainty of hopelessness” requirement, because theoretically, there is always hope that they can win the lottery and pay back their student loans.

However, Lieber said that more people should try to file for bankruptcy on their student loans. Through his reporting, he said he estimates only about 1,000 people attempt to get their loans dismissed — and some do. He posits that if more people filed for bankruptcy on the student loans.

Learn more about student loans and bankruptcy in the interview above.

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