New bill to help private student loan borrowers helplessly stuck in debt prison

As it stands, outstanding U.S. student loan debt currently exceeds $1 trillion-more than the country's collective current credit card debt. Nonetheless, potential good news may be on the horizon for students confined to their student loans.

A bill, previously introduced during the last legislative session, was reintroduced earlier this year by three democratic senators that will allow private student loans to be dischargeable in a bankruptcy proceeding.

Current law bans these loans from being discharged unless exceptional circumstances exist for borrowers.

Student loan discharge

In 1978, Congress passed the law first prohibiting federal student loans from being discharged in bankruptcy. (The intent was to prevent those from abusing the bankruptcy laws and immediately filing for bankruptcy upon taking out high-dollar loans for school.)

Then in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed that extended this ban to private student loans.

To date, those drowning in student loan debt, even people without the means to repay them, are stuck with them for life-apart from essentially death, disability or a prison sentence.

However, a new bill known as the Fairness for Struggling Students Act of 2013 may change this. The bill, introduced by senators from Illinois and Rhode Island, aims to reverse the 2005 law and essentially allow private student loans to be discharged in bankruptcy.

Advocacy and opposition

Advocates argue that private student loans are much like credit card debt. They typically come with high, variable interest rates-double digits in some cases-with little recourse for those who find themselves in financial hardship situations. Bill advocates say private loans should be treated the same as other unsecured debt when it comes to bankruptcy.

Despite the bill's favorability, it's expected to be met with strict oppositions since millions of dollars are at stake for lenders. But, not all lenders are against the measure.

The President and COO of Sallie Mae, one of the top student loan lenders, sent a letter to bill sponsor Dick Durbin (D-Ill) indicating that he was open to both federal and private student loan discharge as long as borrowers attempt to make a good faith effort to repay the balance.

The bill is now up for review in the Senate Judiciary Committee.

It's estimated that private student loans account for roughly $150 billion of the $1 trillion outstanding U.S. student loan debt.