Student Loan Bankruptcy

Several types of debts, student loans continue to be one of the few exceptions while you are able to declare student loan bankruptcy to eliminate. Recently, student loans cannot be discharged through traditional student loan bankruptcy procedures. Despite your how far you might be behind on your loan payments or income status, the fact is that discharging your student loans by bankruptcy, at this time, is not a choice. But, there are indications that this can be changing in the future.

Your Student Loan Discharge Options

While traditional student loan bankruptcy is not yet an accessible choice, some procedures can be tried to make student loans discharged, even though they are anything but easy. These procedures apply to each federal and private student loans and are outside the traditional student loan bankruptcy process. Congress got federal student loans ineligible for discharge to secure the solvency of the federal loan program. But, if borrowers can verify that they meet certain standards, exceptions have been made. The process is complicated though.

(Also, a recent court case shows that discharge may also be possible if the borrower can prove their student loan did not constitute an “educational benefit.”)

Private Student Loan Consolidation

Private student loan consolidation is available through various banks we work with to combine all your student loans into one new loan. Private student loan consolidation requires a good credit score and will often have better rates than the federal student loan.

If you do choose to pursue the discharge process, here are the necessary moves:

  1. Begin with an Adversary Proceeding – This is a real lawsuit filed as a component of a student loan bankruptcy situation to have your student loans discharged (but will be handled individually).
  2. Prove “Undue Financial Hardship” – To “win” this lawsuit; you must show to a judge repaying your student loans would be an extreme financial hardship on you and your family.

This hardship has to meet what is known as the Brunner Standard. To match this standard, you must prove three details:

  • You (and any dependents) cannot match a fundamental criterion of living on your current salary and yet pay your student loans
  • Your current financial status is going to remain for an extended time that will likely cover the whole of your loan term
  • You have tried to make a good faith effort to repay your loan before filing for a discharge

The criteria for these details are rigorous and usually very challenging to prove (some even claim “impossible”). Plus, the attorney charges for even attempting a discharge are also typically high, leading to very few borrowers even bothering to attempt.

  1. Proceed to the Court’s Decision – If you can prove these criteria and get your federal student loans discharged, you will not be needed to make any additional payments. Collection calls will stop at this point too.

(If you’re curious about learning more about student loan discharge, click here.)

Now let’s see at the arguments allowing for student loan bankruptcy reforms in the future.

The Arguments Against and For Student Loan Bankruptcy Options

When reviewing the allowance of student loan bankruptcy choices in the future, it’s necessary to know how we reached to where we are now. Let ’s summarily go over how the current student loan bankruptcy situation came on.

Before 1976, the educational debt was completely dischargeable in a student loan bankruptcy proceeding. Later, legislation was passed that mandated a five-year waiting period before borrowers could attempt to have student loans discharged to preserve the solvency and availability of federal loans. This sequence was then increased to seven years, and in 1998 student loans were then prohibited from discharge at all. The stated purpose at that point was the “blocking of fraud and student loan bankruptcy abuse by student loan borrowers in the future.”

And it’s continued that way since.

Proponents of holding student loan discharge off the table argue that since borrowers had no insurance to guarantee for their loans when they got them—other than future potential earning power—then their loans should be demanded to be repaid (as there is no extra collateral to be acquired in its place). But, those that favor of reforms argue that the student loan crisis has reached the point that student loan bankruptcy choices should be modified thus to combat this worsening trend. They say that the value of education and the general employment view have changed significantly and should be factored in also.

For example, in many situations when student loans were still dischargeable tuition had risen 2,000% from where it was in 1976. Also, the average household income hasn’t increased since early 2000. Supporters of student loan bankruptcy reform also claim that as long as student loans are nondischargeable, lenders have no incentive to underwrite them responsibly. Even though their borrowers don’t pay they can profit continuously off of just interest and fees.

They also claim that the addition of student loan bankruptcy prospects would remove notable numbers of predatory lending. The risk of discharge would require lenders to be a lot more careful when offering student loans.  While this would undeniably end in fewer students attending college or fewer loans being made, the value of individual degrees would increase, and tuition rates would fall as a result.  Accordingly, the allowance of student loan discharges through traditional student loan bankruptcy, they claim, would then build an “upward spiral” from that time forward. But, the possibility of these moves happening soon is yet anyone’s guess.

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For example, in many situations when student loans were still dischargeable tuition had risen 2,000% from where it was in 1976. Also, the average household income hasn’t increased since early 2000. Supporters of student loan bankruptcy reform also claim that as long as student loans are nondischargeable, lenders have no incentive to underwrite them responsibly. Even though their borrowers don’t pay they can profit continuously off of just interest and fees.

They also claim that the addition of student loan bankruptcy prospects would remove notable numbers of predatory lending. The risk of discharge would require lenders to be a lot more careful when offering student loans.  While this would undeniably end in fewer students attending college or fewer loans being made, the value of individual degrees would increase, and tuition rates would fall as a result.  Accordingly, the allowance of student loan discharges through traditional student loan bankruptcy, they claim, would then build an “upward spiral” from that time forward. But, the possibility of these moves happening soon is yet anyone’s guess.

The Future of Student Loan Bankruptcy (And Our Advice for Reforming It)

There is legislation now acknowledging that could change this, while bankruptcy options for student loans currently remain off-limits. But every bill is finding minimal assistance at this time. But with numerous borrowers simply can not pay off their student loans going forward, modifications will have to be made. President Trump has yet to discuss student loan bankruptcy reform directly, although he has put forward a plan concerning dealing with the student loan crisis moving forward.

Here are some reform ideas that, if executed, would go a long way toward developing the student loan crisis moving forward:

  • Reasonable prime interest rates and fees on federal loans
  • Deferment provisions for all student loans
  • Access to Income-Based Repayment for ALL borrowers

Any loans that do not meet these criteria would be counted a higher risk loan and could then be available for discharge within official bankruptcy proceedings. The addition of bankruptcy choices would push lenders to be much more careful about who they made loans to. Thereby putting into motion a cycle of lower-risk loans, expanded value of college degrees in common, reduced student loan amounts for borrowers, and lower tuition across the board. Executing these several ideas would go a long way toward both reducing it going forward and, preventing the student loan crisis from expanding further.

We will keep you advanced on the latest developments concerning student loan bankruptcy options and how they might affect your student loans in the future.

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