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How to Discharge Student Loans in Bankruptcy

bankruptcy and student loansProtections for student loans have increased since 1978. Originally all student loans were dischargeable until:

  1. an amendment in 1978 made student loans dischargeable in bankruptcy after 5 years of repayment  in 1990 bankruptcy discharges for student loans went to 7 years;
  2. later it required the court to rule it was an undue hardship to repay a government student loan in 1998. Private student loans could still be discharged until 2005.

The purpose behind protecting student loans was to protect student loan financing. Later it became a way for lenders to abuse the system by billing the government for attempting to collect loans that were uncollectible. Now the system is strangled with approximately 37% of all loans being un-collectible and servicers billing the government for loans it can’t collect. The government pays private contractors to service and “collect” student loans even if a person is disabled, elderly or in some cases dead. Even worse colleges often promise high wages for degrees for jobs that don’t exist or that can’t repay student loan debt.

Student loans used to allow someone to get a degree at favorable loan rates with affordable repayment. 1970s students only borrowed 3-5 thousand dollars for a degree and primarily borrowed for tuition and books. In 2010 they are encouraged to borrow over 100,000 sometimes at credit card rates and to live on loans with kickbacks from lenders to schools for encouraging students to borrow above their means when the schools know students will not be able to repay loans with junk degrees  to profit private school systems.

Funds from student loans are often used for entertainment and payments to credit cards. Student tuition debt has evolved into a non dischargable form of credit card debt. Lenders lend often at credit card rates because their “educational purpose” debt cannot be discharged. In return for kick backs from the private lenders colleges encourage students to borrow. Bad student loans don’t’ go away, unless there is an “undue hardship”. There is no statute of limitations, and the standard for undue hardship is extreme. Occasionally paychecks are garnished, Income tax refunds are commonly lost, social security benefit over 850 can be attached and being in default for a student loan prevents any home ownership.

Until now hardship discharges were rarely granted and were so limited to the disabled that it  practically didn’t exist for most people. Now some states are beginning to adopt a totality of the circumstances approach. Filing bankruptcy can provide a balanced budget and allow repayment of the student loan at the expense of other unsecured debts. Chapter 13 plans may allow the debtor to make student loan payments in full at the expense of credit cards that are paid 10% or less and finally some people pay off student loan debt by applying funds from other sources such as charging for living expenses and paying on student loans instead of the charge cards.

How to Discharge Student Loan Debt

The main goal in managing student loans is to lower the payment so that life can be affordable. Eventually qualifying for a discharge of the student loan is always the goal. The Income based Repayment (IBR) available from the Department of Education allows below normal income debtors to have as low as a zero monthly repayment. At the end of 20-25 years the loan is discharged. The payments are labled as on time even if the payment is zero. Also while a person works for a not for profit or other public service organization payments and the loan may be forgiven. Even doctors or other high income individuals may have a monthly repayment at about 10% of their incomes.

If the student loans involve a garnishment or if the student loans are private student loans a Chapter 13 may be the answer allowing the debtor to pay little or nothing to the student loan and wait until the loans can no longer be collected after the statute of limitations has run. Our simple power point deminstration shows how to handle and manage the student loan debt problem in a quick 15 minute Powerpoint presentation.

Presently student loans exceed the nations credit card debt. It is very difficult to obtain the Bankruptcy discharge for a student loan. But about 45% of the time when someone applies for hardship through filing an adversary a partial discharge or some form of relief is granted. Making Student Loans non dischargable didnt cure the delinquency. Over 30% of all government student loans are delinquent when forebearance and deferments are included in the default rates (about 25% for 4 year degrees and 35% for 2 year degrees). Private student loans carry even higher delinquency rate. Student loan debt can be managed but there is one and only one chance to properly consolidate student loans into an IBR or to rehabilitate a student loan. The government does not allow a person to rehabilitate loans or consolidate loans into an IBR a second time as a solution to delinquency. The goal is always to make repayment affordable or to discharge the loans so that the student at the end of the plan is debt free.