One of the most common misconceptions about private student loans is that they can be discharged through bankruptcy. Any type of educational student loan, as long as it is labeled as an educational loan, must be paid off. Federal laws are set so that all student loans must be paid off in full. It's virtually the only debt under United States law that cannot be erased through any type of bankruptcy. To ensure the loans are paid off, garnishment of the borrower's wages after a bankruptcy is the most common action taken by banks.
The Higher Education Act of 1997 amended the original Higher Education Act, and changed rules on all types of student loans, including private student loans. This amendment allows for huge fees to be attached to student loans that were late in payment, took away any chance of bankruptcy protection for private student loans and created harsh penalties for borrowers who couldn't make payments. It also allows for the garnishment of wages, tax garnishment, Social Security garnishment, and even withholding of professional and educational certifications until the debt is paid. The Sallie Mae company was one of the main lobbying forces for this bill.
The Student Loan Overhaul bill of 2010 made many changes aimed specifically at private student loans. The law eliminates excess fees that private banks were able to charge students when working with colleges to provide additional student loans for business. The second major change in the program is the maximum amount of income that can be garnished from a borrower. For borrowers who default or are behind on private student loans, the maximum amount that can be forced to be paid back is 10 percent as opposed to the previous level of 15 percent.