Having a bankruptcy mentioned in your credit file can make obtaining a new line of credit like credit cards, car loans or mortgages a non-starter, for years. It may also affect your capacity to land a new job. Yet in a move that would surely invite some serious scrutiny, the Obama administration is weighing whether to loosen Bankruptcy Code, so some borrowers, drowning in college debt (read: outstanding student loans) could unload those burdens and start fresh.
The proposal has been added to a recently unveiled White House initiative called the Student Aid Bill of Rights, which . The legislations, including a new online portal for filing loan complaints that come amid increasing concerns about the debt burden that college students are carrying after graduating. .
Unlike most lines of credit, federal law bars student loans from the government and private lenders from being canceled or forgiven through bankruptcy proceedings, except in cases of severe, authentic hardship. Even in those rare situations, there are less than 1,000 people a year trying to get their student loans discharged through the courts since a bankruptcy action can be costly and cumbersome.
However, the Student Aid Bill of Rights empowers government officials to explore the possible expansion of bankruptcy/debt relief options on federal student loans. Details on such possibilities are yet to emerge.
Why has the idea been floated?
At the time of unveiling the proposal, President Barack Obama, in one of his speeches at the Georgia Tech University said, To make sure that more and more young people can afford to go to college and then afterward aren't so burdened with debt that you can't do anything else. , so significant pushback is likely.
One expected scenario, according to financial aid experts, is to from financial institutions . That's a small subset considering only near about 10% of student loans are provided by private lenders, as per the data supplied by Credit Karma, an online financial services firm.
Considering that a bankruptcy discharge can be one of the most destructive items pinned to your credit report for as long as 10 years, why make such a process easier to enter, even as a last resort? What's the benefit to fight to stay current on student loans if the problem can be resolved in one full sweep?
It is better for former students to opt out of a host of flexible debt repayment options as well as loan forgiveness programs that have been increased in the recent past. Moreover, students and graduates shouldn't forget that several credit counseling services offer free loan restructuring advice. Various aspects of the new Student Aid Bill of Rights plan could minimize the pressure on student loan borrowers and crackdown on lending industry repayments practices.
For instance, the plan instructs the about lenders, servicing providers, debt collection agencies, and colleges and universities.
Another advantage of the new debt relief program applies to borrowers who make extra monthly payments than asked. Under the new plan, , unless the borrowers otherwise approve of such a move.
Still, there's another way to handle these student loan debts, one that's almost every time is lost during policy debates. It starts long before the kids prepare for college and requires diligent family discussion regarding the value of money, the cost of graduating out of college, the importance of choosing schools that are not sources of financial distress, zeroing in on a degree that balances both the cost of education and debt repayments.