No Escape from Student Loans Through Bankruptcy

More and more, recent college graduates are finding that their diploma is less of a ticket to prosperity and more of ball and chain. Is bankruptcy an option?

• Debt loads rising while jobs remain scarce
• Many consider bankruptcy, but find it rarely effective for student loan debt
• Bankruptcy lawyers urge reform

Staggering Totals

The trifecta of a persistent economic downturn, relentless tuition raises, and severe financial aid cuts at public universities means that debt loads are rising while jobs are still hard to come by.

Indeed, a recent report found that college students who took out loans found themselves graduating with an average of $25,250 in debt in 2010, a five percent rise since 2009. A study released in the spring of 2011 found that only 56 percent of graduates from the year before had found jobs, and for those that did, starting salaries were down from previous years.

The totals are staggering: Students borrowed over $100 billion in 2010, and the total unpaid debt in the country now tops $1 trillion– more than the nation’s credit card debt.

Crushed beneath high monthly payments, it’s little wonder that people are investigating bankruptcy when they start having to choose between repaying a loan and putting food on the table.

Survey Says

Over 80 percent of bankruptcy attorneys report that student loan debt was increasingly a factor among their potential clients, according to a survey by the National Association of Consumer Bankruptcy Attorneys (NACBA) on the student loan debt crises.

Among the survey’s findings:

• Nearly two thirds of attorneys found that collection agencies had been more aggressive over the past 18 months.
• Sixty percent of those surveyed said they had seen clients who were being pursued for loans that were more than 15 years old.
• An overwhelming majority of 82.3 percent of attorneys said the limited ability to discharge student debt was “a big problem” for clients needing a fresh start.

Unfortunately, unlike other debts, you can’t just make student loan debt disappear through bankruptcy filing.

“I get a lot of inquiries from people with student loans who want to file bankruptcy,” says Los Angeles attorney Mark Markus, who has practiced bankruptcy law for over 20 years. “When they find out student loans are generally not dischargeable, they decide not to proceed.”

Undue Hardship

There is one way to erase student debt through bankruptcy — get the court to find a person has “undue hardship” in making payments. However, the process is easier said than done.

Markus lists the three factors that a person must satisfy to be eligible for an undue hardship discharge (for the west coast’s Ninth Circuit; other parts of the country may have different but similar tests):

• You cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for yourself and your dependents if forced to repay the loans
• Additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans
• You made a good faith effort to repay the loans

According to the NACBA survey, 94 percent of attorneys said few to none of their clients would have a good chance of getting loans discharged for undue hardship. And unfortunately for those who are eligible, the litigation process is expensive. “To do undue hardship you need a trial, and there are additional fees that have to be paid beyond the regular bankruptcy,” Markus says. “Most of the clients that have a viable undue hardship case can’t afford the attorney. It’s definitely a catch 22.”

Other Options Available

Attorney Mark Markus

If your loans really are crippling and you simply can’t make ends meet, there are other options out there. You may be able to set up payment plans through Chapter 13 bankruptcy (an option that allows you to keep your assets, but mandates payment over time in lieu of debt discharge). “That’s not going to get rid of the debt but it gives debtors the ability to force the student loan creditor to accept whatever the amount per month their budget can afford,” Markus explains. “It prevents student loan people from taking aggressive action to garnish wages.”

Some loans are also eligible for direct repayment servicing without going through a court, and certain other options exist in narrow circumstances, such as death or disability, or if a school goes out of business before a student can complete the degree.

Further elaboration on the available options can be found at the Federal Student Aid website and the Student Loan Borrower Assistance Project.

A Drag for the Forseeable Future

College tuition-induced poverty isn’t going away anytime soon, as tuition costs continue to rise year after year. The NACBA and others have expressed concern that the consequences of unpayable debt go far beyond recent graduates forced to eat ramen noodles in their parents’ basements. “Just as the housing bubble created a mortgage debt ‘overhang’ that absorbs the income of consumers and renders them unable to afford to engage in the consumer spending that sustains a growing economy,” the organization states, “so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future.”

The NACBA outlines several remedies they think should be taken, including:

•     Restoring the ability to discharge student debt through bankruptcy
•     Imposing a statute of limitations on collection of student debt
•     Cracking down on collection agency abuse

The ideas could be a welcome change for those worrying about how they’re going to make their next payment.