Protections for student loans have increased since 1978. Originally you could discharge all student loans until the following events occurred:
- 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.
- Later it required the court to rule it was an undue hardship to repay a government student loan in 1998. You could still discharge private student loans until 2005.
How to Discharge Student Loans in Bankruptcy
The purpose of protecting student loans is to protect student loan financing. However, 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 uncollectible. Then, servicers bill the government for loans they can’t collect. The government pays private contractors to service and “collect” student loans even if a person is disabled, elderly, or dead.
Even worse, colleges often promise high wages for degrees for jobs that don’t exist or that can’t repay student loan debt.
There was a time when someone could get a degree at favorable loan rates with affordable repayment. In the 1970s students only borrowed 3-5 thousand dollars for a degree. At that time, the loan was primarily for tuition and books. In 2010, they began encouraging students to borrow over $100,000—sometimes at credit card rates.
This includes encouragement to live on loans with kickbacks from lenders to schools. Again, this is the scenario in which schools encourage students to borrow above their means. They do this knowing that the students will not be able to repay loans with the junk degrees they offer them. Unfortunately, this is how they profit in the private school systems.
⎆ Student loans are evolving into a non-dischargeable credit card debt.
Funds from student loans are often used for entertainment and payments to credit cards. Student tuition debt has evolved into a non-dischargeable form of credit card debt. Lenders lend often at credit card rates because their “educational purpose” debt cannot be discharged. In return for kickbacks from the private lenders, colleges encourage students to borrow.
Still, 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, tax refunds are lost, social security benefits over $850 can be attached. Moreover, when you are in default on a student loan, it prevents any homeownership.
⎆ Some states are adopting a totality of circumstances approach
Until now the courts did not grant very many hardship discharges. Plus, they are so limited to the disabled that it practically doesn’t exist for most people. However, now some states are beginning to adopt a totality of the circumstances approach. Filing bankruptcy provides a balanced budget and allows 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.
⎆ The main goal of managing student loans is to lower the payment
The main goal of 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. The loan discharges at the end of the 20-25 years. The payments are labeled as on time even if the payment is zero. They may also forgive a loan if a person works for a not-for-profit or other public service organization. Even doctors or other high-income individuals may have a monthly repayment at about 10% of their incomes.
If the student loans involve garnishment or if they are private, Chapter 13 may be the answer. This allows the debtor to pay little or nothing to the student loan. Then, they simply wait until the statute of limitations runs out when the loan is no longer collectible. Our simple PowerPoint demonstration shows how to handle and manage the student loan debt problem in a quick 15-minute PowerPoint presentation.
⎆ Student loans exceed the nation’s 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 they get some type of relief. Not surprisingly, making student loans non-dischargeable didn’t cure the delinquency. In fact, over 30% of all government student loans are delinquent when forbearance and deferments are in the default rates (about 25% for 4-year degrees and 35% for 2-year degrees). Private student loans carry an even higher delinquency rate.
Student loan debt is manageable but there is 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.
Other Related Information
Do you need help managing your student loan? Contact my office right away to start the conversation. Nick C. Thompson, Attorney: 502-625-0905