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Why are some student loans eligible for bankruptcy, but not all?

For most students, earning a college education is virtually impossible without some type of financial help. Students at Washington universities and colleges are often able to achieve various scholarships and other forms of help, although these rarely -- if ever -- cover the full cost of even a single semester. With jobs requiring a college education on the rise right alongside skyrocketing tuitions, students are continually forced to take out loans that are impossible to pay back. Bankruptcy often ends up being one of the best options for addressing the overwhelming burden of these loans.

Despite the increase in dischargeable student loans, the process has not become much clearer to students and recent graduates. This is perhaps at least partly due to the restrictions placed by the U.S. Bankruptcy Code, the Department of Education and the Internal Revenue Code. These restrictions pool together to create an exact definition for what qualifies as a student loan.

In order to discharge a student loan, that loan cannot be a qualified education loan as designated by the IRS. This is based off of an annual list of qualifying institutions put out by the Department of Education. In addition to not being a loan from an eligible institution, it must also be a private loan rather than federal. However, students are often confused about whether their loan is a federal or private student loan because both can go through a bank, such as Sallie Mae. This problem is further complicated by institutions that are added to or removed from the list throughout the years.

The ability to discharge private student loans is still interpreted differently by different judges. This makes it incredibly important for Washington students filing for bankruptcy to have a thorough understanding of their loans and whether it was granted in a year than an institution was considered eligible. Even in the event that a student loan is not fully qualified to be discharged, effectively getting rid of other debt in bankruptcy can help lessen the burden of financial instability.

Source: The Huffington Post, "Some Private Student Loans Eligible for Automatic Discharge in Bankruptcy", Richard Gaudreau, June 21, 2016

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