New student loan legislation, signed in 2010 cuts out private-sector middlemen from offering federal loans as of July 1st, while increasing the federal grant programs. Prior to this private banks offered both federal and private loans which confused borrowers. The average debt among college students in 2008 is up to $23,200, nearly $5000 more than students graduating in 2004. Bankruptcy hardship discharges are hard but not impossible to get for student loans. Private student loans are often more likely to be discharged than income contingent and federal student loans.
Students should maximize federal loans. Federal loans have fixed rates that do not rise with interest. The fixed rates vary from 4.5% for students with a demonstrated academic need, to 6.8% for those who aren’t need based. Also, federal loans offer a very flexible repayment plan, which can be important if you or your recent graduate are struggling to find a job that can pay the bills. Some plans are based on the student’s income.
Credit Union Student Choice program, offers private student loans with an average rate of 6.25% with zero origination fees. There are also more regulations on the radar for Congress. There is a financial-regulation bill in Congress that calls for the formation of a Consumer Financial Protection Bureau that would have oversight over private student loans and other financial products to give borrowers more protection.
Prior to the bankruptcy law change in 2005, student loans owed to private non-profit institutions were dischargeable. But the 2005 bankruptcy law closed that exception and required students to prove that it would be a hardship to themselves and their dependents. Currently, the only way to eliminate student loans in a bankruptcy is to file an adversary with the bankruptcy court and demonstrate that:
- The student borrower has made every reasonable effort to repay the debt
- the student loans impose an “undue hardship”
- and the loans cannot be repaid presently or in the future without imposing and undue hardship.
Bankruptcy cases that were discharged prior to 2005 can be reopened to file such undue hardship cases. Be sure to see how to file for a student loan bankruptcy on our main website to see and download more information.
How to hardship discharge student loans and we will attempt to also explain here step by step how to discharge student loans.