Lawmakers may bring 'safety net' back to student loans

Lawmakers may bring 'safety net' back to student loans

Remaining current on loans is one way consumers may be able to establish a strong credit report, which can be used to obtain favorable interest rates on mortgages, auto loans and credit cards.

Falling behind on them, however, can lead to heaps of interest and make it increasingly difficult to catch up. Some of the most difficult loans to pay off may be those incurred during funding one's higher education.

Since 2005, private student loans have been exempt from the bankruptcy protection extended to other kinds of debts. The same has been the case for government-issued loans since 1978, although federal law has allowed forgiveness to take place after 25 years. Recent reforms could bring change to both kinds of debt.

A law recently proposed by Judiciary Subcommittee on Commercial and Administrative Law chairman Steve Cohen would bring back the pre-2005 bankruptcy protections afforded to private loans. This may allow students to pursue higher education goals without the deterrence of future burdens.

"The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected," Cohen said in a statement.

Cohen also pointed to some of the difficulties students face when burdened by private loans. This type of debt has no forgiveness debt or interest rate caps, allowing balances to build at a growing rate without regulation.

Despite understanding the importance of a affordable education, some House Republicans have said this protection would allow young adults to play the system, according to a recent report by MarketWatch. By receiving huge loans they cannot possibly pay off then filing for bankruptcy, the availability of loans for other students would decrease.

However, National Consumer Law Center attorney Deanne Loonin said that these predictions are unfounded.

"The harsh treatment of students in the bankruptcy system was built on the false premise that students were more likely to abuse the bankruptcy system," she told MarketWatch. "Yet there is no evidence, and has never been any evidence, to support this assumption."

In addition to increasing the size of Pell grants by eliminating subsidies given to banks, recent student loan reform passed alongside the Patient Protection and Affordable Care Act enables those with government-issued loans to receive forgiveness after 20 years.

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