Bankruptcy: What Happens to My Student Loans
The Problem
Today, roughly 70% of American students hold some debt related to their education. In fact, Americans held more than $1.3 Trillion in student loans in 2015 (Federal Reserve). For some idea of the scale of the problem, $1.3 Trillion is roughly the same as the combined federal budgets for the departments of transportation, education, and Homeland Security for the next 10 years.
Given the mind boggling size of student debt held by Americans, it would seem that student loans would be among the first debts to be forgiven in bankruptcy. This, however, is not the case. Student loans are notoriously hard to discharge in bankruptcy. The federal government sees home ownership and higher education as crucial building blocks for a healthy economy. Because of that, the US Government tries hard to ensure incentivize and protect creditors lending in these areas. The government hopes that by making sure that lenders get paid back more money will be available to students, making higher education more attainable. The second and, perhaps, more important reason the government has complicated student loan forgiveness is the fact that the US backs nearly 90% of all student loans. Amazingly, student loans comprise almost 26% of all the US Government’s financial assets (Financial Accounts of the United States 2015 Q3). Needless to say, the government wants to be repaid on its student loans.
What This Means for Bankruptcy
Normally, most types of debt can be discharged in personal bankruptcy. Medical bills, credit card debt, car loans, and signature loans are fairly easy to discharge or reduce in both chapter 7 and 13 bankruptcies, but it must be shown that student loans pose undue hardship on the consumer in order to be discharged. The bankruptcy code requires an additional court process, called an adversary hearing, to settle the issue and prove undue hardship. Bankruptcy courts use a three-part test to determine undue hardship:
- If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.
- There is evidence that this hardship will continue for a significant portion of the loan repayment period.
- You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years). (Federal Student Aid)
If the consumer can affirm these three tests, there is a great chance he or she might be able to discharge their student loans. Otherwise, the consumer will most likely have to live with his or her student debt.
My Options
- Discharge it! If you are one of the lucky few who can meet the three-part test supplied above, then you just might be able to walk away from the ball and chain of educational debt. Keep in mind that you might generate additional attorney fees with the additional court process and hearing; however, what are a few thousand dollars in court and attorney fees to potentially hundreds of thousands of dollars in student debt?
- Qualify for a forgiveness/cancellation plan. Working in certain professions such as nursing, teaching, and law enforcement allows the consumer to qualify for debt forgiveness after a certain period of time, often 5 or 10 years. For more information, look right here.
- Beat it. Clearly not the most attractive option, paying off student loans very well might be a lifelong journey; however, it can be done. There is a plethora of debt repayment aids, financial education courses, and payment tactics that can help a consumer resolve their student debt more quickly and more efficiently. Bankruptcy, though unable to discharge student debt, can help resolve other debt, allowing the consumer to focus their attention on the bigger issues at hand. This option is not impossible. With the proper discipline and a little help from bankruptcy and financial professionals, almost anyone can beat his or her debt.
Conclusion
Because the federal government owns the vast majority of student debt and relies on student loans as a key financial asset, the government does not make it easy to discharge student loans. In most cases, educational debt in non-dischargeable. Nevertheless, if the consumer can meet the three tests of undue hardship, then discharge of student debt becomes possible. For more information on whether or not you are eligible for a discharge or to know more about the options available to you, call us at (918) 585-9500.
