Should you be able to discharge student loans in bankruptcy?
For the 45 million borrowers currently dealing with student loan debt, bankruptcy can feel like the only option, especially when you’re going through a rough time financially.
Where Does Bankruptcy Fit in With Student Loan Discharges?
The pain of sky-high student loan debt is all too real, but it hasn’t been dischargeable (except in rare cases) from bankruptcy since 1976. On the contrary, medical debt, credit card, auto loan debt and even gambling debts can all be discharged in bankruptcy.
Only 0.01% of all student loan borrowers even attempt to try to get their loan debt discharged in bankruptcy, even as the debt woes mount.
A report from the National Association of Consumer Bankruptcy Attorneys shows that among 860 lawyers, 80% say they have clients who say they are either “somewhat” or “significantly” burdened with higher student loan debt in the previous four years.
How can I file bankruptcy with student loans?
It is difficult and rare to file bankruptcy against student loans, but it is possible. You need to prove that it would cause undue hardship to repay the loans, such as repaying loans would result in you and your dependents in poverty (not maintaining a minimum standard of living).
Why can’t you get rid of student loans in bankruptcy?
Congress has toughened bankruptcy bills, most notably via the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. That legislation mandated that no student federally-funded or private student loan could be discharged in bankruptcy unless borrower could prove “undue hardship” under strict legislative conditions (like a serious illness or disability.)
The good news is that the U.S. Department of Education has been looking into the issue of discharging student loan debt in bankruptcy, requesting public feedback on the issue in 2018. Outside of the Student Borrower Bankruptcy Relief Act of 2019 – which would allow loans to be discharged but has not moved forward, no concrete action has been taken on the topic by Congress. Public advocacy groups like Student Loan Justice and the National Consumer Low Center are still applying pressure to federal legislators to take action.
Even large student loan servicers such Navient have lobbied Congress to change the rules on student loan discharges in bankruptcy.
Pros and Cons of Student Loan Discharge in Bankruptcies
Whether or not Congress does take action on student loan discharges, the issue has no shortage of backers and critics making the case for or against student loans and bankruptcy statutes.
The Pros of Student Loan Discharge in Bankruptcy
You’re also protected from other debts. While in bankruptcy, you’re automatically protected from other common debts, such as credit card or medical debt. If Congress does pass legislation that includes student loan borrower protection, those borrowers will buy some much needed time to get their financial lives in order.
It would boost the U.S. economy. Free from student loan debt, borrowers would have more money to buy home, cars, open new businesses, invest in the stock market and pay down their other debts.
The Supreme Court states the case. There is legal precedent on massive loan debt and bankruptcy discharge – and it’s from the highest court in the land. Back in 1915, the U.S. Supreme Court stated that bankruptcy should “start afresh free from the obligations and responsibilities of debt.” Student loan advocates say that’s one big reason why the issue should be contested in court. After all, a 19-year-old college student doesn’t have the knowledge or experience to fully comprehend the debt load they’re taking on with a student loan – a load that may take decades to eliminate.
The Cons of Student Loan Discharge in Bankruptcy
Your credit will suffer. Once you sign in the bottom line on a bankruptcy deal, the very act of being in bankruptcy will remain on your credit report for seven to ten years. While you could still buy a home or car, for example, you’ll likely pay higher interest rates and you’ll get lower credit limits on things such as mortgage loans and credit cards.
It could severely damage the student loan system. If borrowers can simply take out massive student loans and discharge them in bankruptcy, lenders – including the U.S. government – would be much less likely to issue student loans in the future.
It could make college more expensive. If student loans could be discharged in bankruptcy, borrowers would make a huge run on the student loans that are available, which they may or may pay back. Some smart financial types say there is a direct link between the availability of student loans and tuition costs. According to the Federal Reserve Bank of New York, more student loan borrowers would translate into “higher tuition aid by all students.”
Struggling with student loan debt? Consider these options:
- Apply for a deferment or forbearance of your loans.
- Find a job that will also repay your student loans.
- Make small changes to repay your student loans.
- Consider refinancing your student loans to potentially reduce your interest rate and monthly payment.
Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.
- Check out these 70 ways to pay student loans faster.