Bankruptcy can help with student debt
Despite what you may have heard, the truly desperate can have their student loan debt forgiven in bankruptcy court. But it's not easy.
Whenever you read about the immense amount of outstanding student loan debt in this country, you invariably read that student loan debt cannot be discharged in bankruptcy court.
Well, that's not quite the case. A discharge of student loan can be done if your circumstances are sufficiently and demonstrably dire. You also have to prove to the court that there's no reason to hope that they'll get any better for the life of the loan, according to an excellent Ron Lieber story in The New York Times.
In other words, bad luck and hard times are your lot in life, and you must convince the judge of that fact.
It didn't used to be that way. Student loan debt was dischargeable in bankruptcy before the mid-1970s. Then Congress began gradually tightening the rules for federally guaranteed student loans, and it finally eliminated bankruptcy discharge for private student loans -- including those issued by banks -- in 2005. (FinAid.org has an interesting timeline of the changes here.)
"That essentially lumps student loan debt in with child support and criminal fines -- other types of debt that can't be discharged," Kayla Webley observed earlier this year on Time.
(While programs exist to forgive or reduce federal student loan payments, those options aren't available for students who took or take on private student loan debt. That's why people who are advocating a change in the bankruptcy laws are focusing on making private student loans dischargeable in bankruptcy.)
If you borrowed it, you have to repay it -- unless you can prove to the bankruptcy judge that your student loans are causing an "undue hardship" for you and your dependents. How do you make your case? (Post continues below.)
A federal website that explains ways to have federal student loan debt canceled, forgiven or discharged explains the bankruptcy courts' three-part test (and you have to meet each and every one of these):
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).
Many judges have adopted a "certainty of hopelessness" test, Lieber writes, which requires them to believe that you truly have no hope of earning an adequate living now and for years to come.
These cases can drag on for years, and the government may fight you every step of the way. (A Palm Beach Post story this week, by the way, detailed how the feds have greatly increased the number of lawsuits they file against student loan defaulters.) The Times story focuses on a 31-year-old college grad, now legally blind, who first went to bankruptcy court six years ago. He's seeking the discharge of $89,000 in student loans.
The good news is, studies mentioned by the Times show that 39% or more of undue hardship applicants are successful in getting part or all of their student loan debt forgiven. Fewer than 1,000 people try it each year, the Times says.
What do you think? Should bankruptcy be restored as an option for those unable to repay their student loans -- either private loans or those guaranteed by the federal government? Should bankruptcy standards be relaxed to help the unfortunate?
Some don't think so, at least not for federal loans. Wrote one reader of the Times:
Many people are financially handicapped for life by no fault of their own. However, if you choose to take the risk inherent in taking out a loan, you do not fall within this group. You took a risk. You took someone else's money and agreed to pay it back with interest. Other taxpayers who did not take that money should not have to pay for you.
More on MSN Money:
- Grandma's new worry: Student debt
- Are universities unethical?
- 11 surprising student loan facts
- Student loans push up bankruptcies
- Student loans sink Mom and Dad
- Will I be able to pay back my student loans?
VIDEO ON MSN MONEY
Student loans should not be dischargeable. I borrowed money so I could go to college but I didn't go to the most expensive college I was accepted to. I went where I could receive a suitable education and where I could afford. I knew when I signed for the loans that I had to start paying them back 6 months after I graduated or left school for any reason. When I graduated, the monthly payment was higher than I could afford at the time so I extended the life of the loan by 5 years. Does it suck? Absolutely!! But guess what? I agreed to the terms when I signed the loan documents.
I'm so tired of reading about folks who borrow money and then moan and groan when they have to start paying it back. Deal with it!
So I go to a college I could afford thanks to an academic scholarship and major in Biochemistry and Biomedical Science and go on to med school, work my **** off to pay off my minimal student loans, and you tell me Liberal Arts Billy over there gets a free $100k because he can't get a job with a women's studies degree?
Something seems wrong with that picture... Maybe Liberal Arts Billy should have looked at the employment statistics before choosing a major - maybe he shouldn't have gone to college at all if he was just going to major in a field where there are no jobs. You should not be able to go to college if you are too inept to research job statistics.
My husband and I will have paid back over 100k once we finally pay it back ( in 7 years). Our debt load is manageable, we just have to say no to a lot of things.
Just because my husband took the long way through college about 80k, does not make it necessary for the tax payers in America to pay for his Immaturity at the time.
If you can't pay it back- or wont pay it back. Don't go to school. People need to have some personal responsibility. There are too many cry babies. I can tell what 50% of my friends had helicopter moms as they grew up... They can't tie their shoes without asking a question. Parents need to educate and give tools to their youth and let them make some mistakes when they are younger than college age. It is not helping our lives or the future of America to have complacent idiots as the next generation. If you want to blame someone... take a look in the mirror. It isn't Obama or Romney. Wake up!
NO student loans shouldn't be discharged. There should be limits on how much a person is allowed to borrow. The limit should be a limit on how much can be borrowed. Majoring in art history....limit is $1000. Mechanical Engineering.......$40,000 or less, because in my opinion a lot of things that students believe are necessities really aren't.
This is a true story...A parent with just 30,000 saved in 1980 could of got a cd rate of 10-13%! College cost (room and board) 4,000 per year! Do The Math Today college cost 25,000(room and board) per year....1%cd? 2%cd? $1,000,000,000 saved? I really doubt it! Do the math! I realize college isn't for everyone,but it's not affordable for most parents! I would like to think that most parents would like to see their children suceed in life,college is all about opportunity,more doors open!Sky scrapers,bridges,cars,computers...weren't built with just strong backs,strong minds were first! If college cost had been kept under control this would never of been a topic of discussion. The American dream is a carrot just beyond most...(99%)!
In my opinion education loans are going to be the next bubble. We have been sold on the scheme that everyone must have a college education to be successful. While it is true that college educated people have made more money in the past there is no certainty that will be the case in the future. With the glut of college grads hitting the market a degree is simply not worth what it used to be. However they cost much more than they used to and have far outstripped inflation. Since we can't grow the economy by inflating the housing market we are growing it by inflating the value of a degree. You have to submit to a financial colonoscopy to get a housing loan now but all you need to get a student loan is a pulse and a school that will take you. Does that sound scary? It should. At least with housing, there were some hard assets that held some value. Little Billy probably forgot what he learned Friday morning by the second beer Friday night.
The housing bubble was created to mask the exodus of jobs overseas and the subsequent loss of wealth producing activities here in the US. The monetary system requires that money must be constantly loaned into existence in ever greater quantities or we go into deflation and crash. We all saw what happened to housing and you will soon see the same thing for those with inflated college degrees. The only difference is that you could walk away from a bad mortgage but these student loans stick to you forever.
Right now the jobs our college grads used to get are in India and China. Until we fix that they arent' going to be paying off those 6 figure loans any time soon. It's also a double whammy that the bad economy is sending even more kids and adults to college than before because they don't have jobs. Let's see, I don't have a job so I think I will take on $100,000 debt and get that Psych degree I always wanted. Our conventional wisdom since WWII has been that more education is always better. I predict alot of kids are going to ride that mantra straight to the poorhouse.
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