As many as 540,000 students may default on their student loans

Carmen Gardiner, 25, a 2007 graduate of Louisiana State University, is weighed down by her private student loans. Her debt is now about $80,000, and her monthly payments are more than $600. Gardiner's undergraduate degree is in psychology. She lives with her husband, who is still in college, and earns $13 an hour at a call center in Atlanta. They have a 6-month-old daughter.

She hasn't defaulted on her student loan. But she doesn't see much hope. Bankruptcy would not discharge her debt.

"I'm completely sour about the whole idea of going to college," she says. "My future is gone before I have a chance to make one. But if I could discharge this using bankruptcy, it would be better than winning the lottery."

There is little information about unregulated private student loan debt. But during an investor meeting, Sallie Mae, the USA's largest private student lender, recently projected that 40% of $6 billion in subprime private student loans will default, according to Student Lending Analytics, an independent research company. That means 360,000 to 540,000 borrowers are likely to default on their loans, SLA said.

The only way that people with private student loans can get help in bankruptcy is if they can prove undue hardship. And to do that they have to go through a separate trial, which is an extra cost, involves witnesses, legal assistance and extra expertise, says Deanne Loonin, staff attorney at the National Consumer Law Center. It is a huge barrier.

But in April, both the Senate and House introduced legislation to allow for private student loans to be dischargeable in bankruptcy. Before the bankruptcy law changed in 2005, only government-issued-or-guaranteed student loans were protected during bankruptcy.

"The high interest rates on private student loans have made them incredibly profitable for loan companies and saddled students with crushing debt," said Sen. Dick Durbin, D-Ill., who first introduced this legislation in June 2007.