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With tuition rates skyrocketing for colleges and universities throughout the nation including those located in Miami and South Florida, to attain a higher degree, many are forced to take both private as well as federal loans. As we wrote about in a previous blog post, some financial experts expect the next wave of individuals facing bankruptcy to be students saddled with debt from higher education loans. For some former students the future is now.

Individuals who find themselves with a lot of debt from multiple sources, including from school loans, are filing for bankruptcy in an attempt to start over with a clean slate. Unfortunately, the end result is not always all that they hope for. This is because often the heavy debt burden brought about by school loans is in the form of private school loans which is not dischargeable in a bankruptcy proceeding.

Regardless of whether one files for bankruptcy under Chapter 7 or Chapter 13, the end result of a bankruptcy filing is usually a discharge of any remain debt in the form of car loans, mortgages, medical bills and credit cards. Private school loans are not included in that list. They, along with several other types of debt, including criminal fines and child support payments still remain at the end of a bankruptcy.

School loans were not always in that category. Prior to 1976, all loans secured to pay for school were discharged in bankruptcy. Since then laws have continued to tighten the ability for a student to discharge the school loan debt.

Interestingly, what is currently the largest private lender, Sallie Mae, has indicated that it would support changes to the law which would make it possible for people who owe money on school loans to have those loans discharged after a certain length of time. The caveat is that the same rule would need to apply to the discharge of federal loans as well.

Whether a change such as the one Sallie Mae supports will come to fruition remains to be seen. In the meantime, it is important for anyone who is considering filing for bankruptcy to get all of their questions answered by consulting with a bankruptcy attorney.

Source: Business Week, “Even after bankruptcy, trapped by student debt,” Justin Pope, April 25, 2012