The House and Senate are reviewing legislation that could allow bankruptcy courts to treat private student loans like other unsecured debt such as credit cards, which could mean that borrowers would have the ability to discharge private student loans in bankruptcy. Currently, both private and government backed student loans are treated like other hard to discharge debts such as taxes and domestic support obligations which can only be discharged in bankruptcy under certain circumstances. But if the new legislation is passed through the House and Senate, private student loans which are not backed by the government would be eligible for bankruptcy discharge in the same way a credit card debt is dischargeable in bankruptcy.
Before 2005 bankruptcy reform, private student loans were dischargeable in bankruptcy, however, bankruptcy law changes gave private student loan lenders more protection from bankruptcy discharge. But one of the complaints about private student loans is that they are very expensive and have high interest rates which are variable, making them very difficult for former students to repay in their lifetime, let alone in a few short years after college graduation. Some backers of the new legislation that would allow a bankruptcy discharge of private student loans compare the loans to subprime mortgages because they take advantage of young borrowers who do not understand the true costs of the loan they are taking. A matter of fact, a study found that many students inadvertently took out the riskier private student loans before they had maxed out the limits for the much safer and flexible government backs student loans.