The beaten-down American consumer is in the throes of scratching his way out from under the mortgage loan lending crisis, and now there is a new and looming catastrophe: the ever-growing student loan crisis. Student loan borrowing exceeded the $100 billion mark in 2010, and total outstanding student loans surpassed the $1 trillion point for the first time in 2011. More startling is that this student loan debt is larger than credit card debt, which stands at approximately $798 billion. Keep in mind that this debt is not limited to the student-age population. Instead, it is debt that is also part of the households of the parents of these students, who are borrowing for their children. With rising debt comes increased risk, both to the borrowers and to the economy in general says the National Association of Consumer Bankruptcy Attorneys in a report entitled “The Student Loan ’Debt Bomb‘: America’s Next Mortgage-Style Economic Crisis.” While crippling debt levels are always an onerous burden, in the midst of an economic recession, repaying these loans becomes much more difficult.
There is a distinction between getting student loans from private loan institutions versus student loans backed by the federal government. Borrowers of government student loans have the protection of fixed, affordable interest rates, generally lower fees and more repayment options. Private student loans are made by lenders to students and families outside of the federal student loan program. They are not subsidized or insured by the federal government and may be provided by banks, non-profits, or other financial institutions. They generally do not have the liberal repayment options, the interest rates are usually higher, and they are very aggressive in their repayment and default pursuits.
Many bankruptcy attorneys are seeing more and more consumers coming into their offices seeking help through bankruptcy. Discharging student loan debt through Chapter 7, while not impossible, is extremely difficult. The only way that a debtor can demonstrate to the bankruptcy court that his student loan debt is dischargeable in Chapter 7 is if he is able to demonstrate “undue hardship.” What does that mean? There is no legal definition of “undue hardship” in the bankruptcy realm. Most courts look to requirements set out in a bankruptcy case Brunner vs. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987). These three requirements are as follows:
- You must prove that you cannot maintain, based upon current income and expenses, a minimal standard of living for yourself and your dependents if forced to repay the loan;
- Additional circumstances must exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and
- You must have made a good faith effort at repayment.
The District of Columbia metropolitan area follows the requirements listed in the Brunner case. In two other court circuits outside of the Washington, D.C. metropolitan area, a somewhat more flexible “totality of circumstances” analysis is applied to determine “undue hardship” and ultimately whether student loans are dischargeable in a Chapter 7 bankruptcy. This test considers:
- The debtor’s past, current and reasonably reliable future financial resources;
- The debtor’s and the debtor’s dependents’ reasonable necessary living expenses; and
- Any other relevant facts and circumstances applicable to the bankruptcy case.
In either instance, though not impossible, it is extremely difficult to discharge student loan debt in a Chapter 7 bankruptcy. Even if you cannot prove undue hardship, another option to consider is repaying your student loans through a Chapter 13 bankruptcy plan.
The most important aspect to consider is substantial pre-college planning that includes methods to minimize your college expenses plus less expensive school options such as state schools and community colleges, early financial aid submissions and exhausting all grant and scholarship options, including lesser known, smaller, grant and partial scholarship programs. If getting some student loans is your only means of paying for post-secondary school, getting the smallest amount as possible for only school-related matters is paramount. Finally, if possible only acquire student loans through the federal government student loan program, as opposed to private student loan lending resources.