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The White House and current administration believes that Chapter 7 bankruptcy regulations should be modified to help people discharge a portion of student debt. This position is displayed in the Education Department and Consumer Financial Protection Bureau’s recent report. Observers in Miami and around the country are awaiting the response from Congress.

Although the President’s proposal would not apply to most federally-issued student debt, it could affect around 15 percent of the $150 billion now outstanding. Current bankruptcy legislation, revised in 2005, bans the discharge of student loans.

The Consumer Financial Protection Bureau chief believes Congress would be “prudent” in considering a bankruptcy code modification. The exorbitant cost of higher education matched with the job market morass could decimate the financial position of some younger graduates.

The political fallout, if bankruptcy protection were allowed for student debt, could be loud and emotional on both sides of the issue. Opponents argue that bankruptcy protection could become a strong magnet for students to disregard their loan obligations. They also caution that this modification could ramp up interest rates, as the loss risk increases.

However, the largest private student loan issuer, Sallie Mae, offers support for changes that permit bankruptcy protection in “limited cases.” They might agree to allow bankruptcy discharge for those students who have made a demonstrable good faith effort to repay over a “five- to seven-year period,” but continued to face serious financial difficulty.

Where do you stand on this issue? Should private and federal student loans be dischargeable in certain circumstances? Is the staggering cost of higher education matched with the value of an advanced degree?

Source: The Wall Street Journal, “Obama Administration Backs Bankruptcy Option for Some Student Debt,” Josh Mitchell, July 20, 2012