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Bankruptcy Filer Takes Student Loan Servicer To Court

PARKER, Colo. (CBS4) – The Federal Reserve estimates that student loan debt is a $1.5 trillion problem in America. This debt is sinking many families into bankruptcy, but a new interpretation of the law may be offering some relief.

Paige McDaniel decided to go back to school to get a bachelors and masters degrees in business administration. She chose the online program at Lakeland University.

"I didn't want a publicly traded school. I wanted a school that was an actual university, and had a focus on academics," McDaniel told CBS4.

She took out federal student loans to cover the cost of her bachelors and masters degrees in business administration.

"You're always raised, the more education you have the better off you're going to be," she explained.

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In addition to the federal student loans, McDaniel signed up for about $120,000 in private student loans.

"Started getting direct mail from Sallie Mae, who had my federal loans at the time, offering additional loans to help with additional expenses, so I did take out some of those loans as well," McDaniel said.

She didn't realize the loans were different. Federal student loans have a fixed interest rate, and manageable repayment options. Private education loans have a variable interest rate, and no repayment help.

"That one mistake is…is the biggest regret of my life, and has hurt my family, to the point where it would have been better for me not to get the degrees," McDaniel said.

She soon found herself in over her head. The loan servicing company was billing her $1500-a-month just on the private loans. She ended up declaring Chapter 13 bankruptcy, but even that didn't help. She paid on the loans through the proceeding, but still came out owing more than she borrowed.

"We knew the federal loans could not be dismissed, but the private loans were supposed to be," she explained.

Traditionally, in bankruptcy court, any loan with the word "student" associated with it has not been dismissed. New York lawyer, Austin Smith, has a different take on the law.

"These loans that we're litigating, these are just like credit card debt. It's the exact same thing as if a bank gave a student as credit card," Smith explained.

He argues that private loans that are not used for education expenses, should be treated like any other personal debt, and be dismissed in bankruptcy.

"We have not lost on this issue yet," Smith told CBS4.

Navient Solutions holds McDaniel's loans, and is one of the largest student loan servicers in the country. It's facing several lawsuits about it's lending practices including those filed by Attorneys General in Illinois, Washington, Pennsylvania, and California. It's called the allegations in those cases unfounded, and in a statement to CBS4 about McDaniel's proceeding, it said:

"It went from this is the solution, not one we wanted, but this is the solution, to we're in worse shape than we were before," McDaniel said.

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Her payments are on hold pending a court decision, but the balance keeps ticking up. It's at more than $260-thousand now.

"I can't breathe when I look at it. It's a panic. There's no way out of this," she said.

Colorado Congressman Jared Polis has introduced a bill designed to keep student from getting into this situation. The Know Before You Owe bill would require Universities to counsel students on the difference between federal and private loans before they sign up for them.

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