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Congress debates student loans and bankruptcy exemptions

Student loans are the biggest source of consumer debt in the United States. Accordingly, there has been a lot of discussion concerning bankruptcy exemptions and private student loans in Tennessee and across the country.

Shortly after proposals for modifications to bankruptcy codes came forward, we covered the suggestion made by the Consumer Financial Protection Bureau and U.S. Department of Education. Since that time, proponents and opponents of the plan have weighed in.

The debate over the policy shift follows the rise in student loans as a percentage of overall consumer debt, as well as the spike in filing for bankruptcy caused by the U.S. financial crisis. The debate has inspired comments from all types, including one Tennessee lawmaker who is a member of the Senate banking subcommittee.

The position taken by those who support bankruptcy reform is that preventing borrowers from discharging private loans in bankruptcy allows the lenders to grant loans without adequate consideration for the borrower's financial circumstances. In addition, this protection for lenders discourages them from modifying or adjusting repayment terms when borrowers found themselves facing tough financial times.

Government agencies are not the only ones that support bankruptcy reform. According to a spokesperson for Sallie Mae, the company supports allowing consumers to discharge their debt through bankruptcy if they make a good-faith effort to repay their student loans over a period of five to seven years. Furthermore, the chief operating officer of Sallie Mae told the Senate banking subcommittee that he supports allowing new federal and non-federal student loans to be eligible for discharge.

Everyone, however, does not share this position. The previously mentioned Tennessee lawmaker said, at the same hearing, that he worried that a change to the current bankruptcy law would create a significant hardship for private lenders. Others share this sentiment as well.

Wells Fargo, for example, came out adamantly opposed to changing the existing laws. The bank argued that rather than encouraging bankruptcy as the primary repayment tool, banks should focus on expanding repayment options. But this begs the question, if the answer is in the hands of the banks themselves why haven't they expanded the options already?

Source: Huffington Post, "Private Student Loan Bankruptcy Rule Traps Graduates With Debt Amid Calls For Reform," Tyler Kingkade, Aug. 15, 2012

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