Experts suggest college student loan debts may be the next bubble, like the housing market, that is likely to burst. So what do you do if you have high student loan bills you cannot pay? Maybe you have considered filing bankruptcy, hoping you can discharge your student loans?
The job market is anemic and college graduates cannot find work. To make matters worse, according to Fox News, there are currently $1.11 trillion in student loans outstanding and $121 billion of them are 90-plus days delinquent or in default. Experts now suggest what many of us have known for years, we should expect the government to push for a taxpayer bailout of the government-subsidized student loans program.
No one questions that a college degree pays. Data suggests that graduates with a four year degree have had earnings which have doubled over their high school graduate counterparts over the last 30 years. College degrees are also immune from economic crises and cannot be lost if the bank repossesses your home, but data suggests that starting in 2010, student debt exceeded credit-card debt for the first time in history. This fact has left many wondering if taking out student loans is still a good idea.
What happens when you live with your parents until you are twenty-six and graduate with $50,000 worth of student loan debts? It will be more difficult to purchase your first home, a trend which is leaving many young and educated young adults out of the housing market.
A means test was instituted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The idea of the bankruptcy changes was to make it harder for serial filers to abuse the system while offering token protection for consumers. Since a student loan is not considered a living expense under the means test, I find the law somewhat obfuscating the intent of protecting consumers. Continue reading
One of the debts exempt from a bankruptcy discharge is a student loan debt. It use to be that only certain government type student loan debts were exempt from bankruptcy discharge, but after the 2005 bankruptcy law changes, both private and government student loan debts are now exempt from discharge. Nevertheless, there are different ways you can defer the payments of your student loan. Continue reading
Can you get a student loan discharged if you have co-signed the note and filed for bankruptcy?
This question was asked by a blogging debtor on a bankruptcy forum website recently. He wrote, “I filed CH7 and it was discharged 2 years ago. The student loan taken out in my name, for my daughter’s education, was included in the BK7 filing but obviously not discharged. I have continued paying on that loan for 2 years. The economy being what it is, my daughter is unable to find work that pays enough to take over the student loan payment. What happens if I default on the loan ? I know my credit will be thrashed – it already is ….Can the Dept. of Education sue me and/or garnish my wages ? Any suggestions on negotiating the balance and/or interest rate down?”
There are two types of student loans- private and federal. In the case of the blogger illustrated above, it appears he co-signed a federal student loan for his daughter.
In times past, only federal student loans were exempt from bankruptcy discharge unless the borrower and co-signer could prove undue hardship. Today, both types of student loans are exempt from bankruptcy discharge unless you can prove undue hardship.
Proving undue hardship in student loan cases is very difficult to do but not impossible. If you make a successful petition of a court of law, you can get your student loans completely or partially discharged in some cases.
Courts use different tests to evaluate whether or not a student loan borrower has shown an undue hardship. The test most commonly used in courts to prove undue hardship requires:
the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans;
additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
the debtor has made good faith efforts to repay the loan.
These three criteria, called the Brunner’s Test, can be used by courts to determine undue hardship, or the courts can use a part of the criteria to determine undue hardship.
Can the federal government garnish your wages if you default on a student loan? The federal government can garnish wages up to 15% of your disposable monthly income but no more than the equivalent of 30 times the current federal minimum wage.
In the case of the co-signer in the illustration, if he defaults on the loan, the government will most likely garnish his wages. The government can sue you for the default, and if successful, can even take a certain percent of federal benefits, like social security retirement, to pay the loans.
Before anyone defaults as a co-signer or primary borrower on a federal student loan, they can go to the Department of Education’s Ombudsman for financial help. You must take the steps to resolve the problem on your own first before the Ombudsman will assist you. You can contact the Ombudsman at 877-557-2575 or visit its website at www.fsahelp.gov.
Before you co-sign on your child’s student loans, beware of your obligations under the law. Filing bankruptcy will not necessarily mean you will get the loans discharged.
Private student loans are made to prospective students who want to get a post high school education to develop their skills to become more employable. These private student loans are made by banking institutions and companies who specialize in providing money for the cost of higher education. You might think they are basically the same as federal student loans which are loans guaranteed by the government of the United States. If you thought that, you would be wrong.
While basically both private and federal student loans accomplish the same goal of providing money for higher education, they are not always governed by the same laws.
An ABC news article made this point when posting on the internet April 27, 2012.
The article dealt with a former student at Rutgers University who had made student loans to attend college and then sustained a traumatic brain injury that ultimately led to a coma, then death. The story caught national attention when the private student loan bank, Key Bank, continued to try and collect the loan long after the debtor died.
The father, who had co-signed the note, had to eventually come out of retirement to try and pay the loan off. After an online petition signed by over 81,000 citizens requesting Key Bank discharge the loan, the bank finally relinquished and settled the debt last week. The private student loan borrower, Christopher Bryski, died in 2006 of his injuries.
The federal student loans held by Bryski were forgiven upon his death, according to current federal law. There is no such law for private loans, though. Key Bank, although facing a personal relations nightmare, had every legal right to continue seeking the payoff from the co-signing father and/or the boy’s estate. The personal relations pressure of the 81,000 signatures evidently did the trick.
The case has renewed public interest in making laws that are consistent throughout the system. The private student loan industry has substantially grown in the past 25 years having gone into competition against the U.S. Government. The private student loan industry is a multi- billion dollar industry today.
Large banking creditors have spent millions in lobbying Congress to pass friendly lending laws that support the industry. One such successful law passed in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act, made private student loans equal to federal student loans in their exemption from bankruptcy discharge. Before the law was passed, private loans could be discharged in bankruptcy, but today, they cannot be discharged.
Some say private student loan creditors became even more powerful because the loans have been associated with high interest, fees, and penalties the federal loans do not enjoy. That means the industry has a lot to protect that would be unfriendly to the consumer.
There is no doubt in the mind of this blogger that the private student loan industry should be held to the same high standards as the federal student loans. The laws ought to be made consistently across the board to reflect the entire spectrum of the industry. The Bryski case is just one example of the need for reform.
The Proposed Law Change
The Fairness for Struggling Students Act of 2011 was introduced in the Senate by Senator Richard Durbin (D-Il.) on May 26, 2011. This act, if passed, will “revise federal bankruptcy law with respect to the exemption from the exception to discharge in bankruptcy for certain educational loans if excepting such debt from discharge would impose an undue hardship on the debtor and debtor’s dependents.” As the law now stands, it needs to be revised.
The current status of the act today is that it has been introduced only, but it is a bankruptcy law change worthy of discussion concerning the fairness of how America currently helps millions of its citizens pay for their college education.
The Importance of Education
We have all heard the mantra, “Get a college education if you want to succeed.” From the Baby Boomers on, up to 28% of the work force today have heeded the advice that a college education is the most successful way to succeed. There is an overall direct correlation in America between the amount of education workers have and the amount of financial success they have in life time earnings.
The Problem with Student Loans for College Education
With only 28% of our current work force college educated, obviously college is not for everyone. One of the greatest reasons more people do not pursue college is the rising costs. From 1985 to 2005 the cost of college increased 439% compared to 108% for the consumer price index. That means college costs have increased 4 times faster than the cost of living.
One of the ways Congress has been combating this national problem is through programs guarantying student loans. To help compensate for the overwhelming need for more money, Congress has given lenders representing private student loans the same authority enjoyed by federal student loans.
Private student loans have been the most profitable and fastest growing segment of the student loan industry. Since the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act was passed, private student loans have enjoyed the same status as federal student loans in exemption from bankruptcy, but private student loans have enjoyed a more lenient environment as to interest rates, fees, and collection practices. Many of the private loans have interest and fees comparable to the credit card industry.
With the student private loan cut in the industry coming to over $1 trillion dollars of debt a year, the industry has surpassed the credit card industry for debt. The average student loan is $24,000, but only 56% of the 2010 graduates were able to find employment. This relates to more borrowers of student loans not being able to repay their loans.
The Solution to the Problem is in the Act
Federal student loans are much different than private student loans. With federal loans, there can be repayment assistance, forgiveness, and relief programs. Private student loans are no different than any other kind of private loan.
The Struggling Student’s Act of 2011 proposes to return private student loans to their former status as non-exempt in bankruptcy. Anyone having gone through the tough US Bankruptcy Court System will attest how important fairness is in starting over and how unfair it is that private student lenders enjoy such elevated status.
- Private Student Loan Scam and How Bankruptcy Law Contributes (betterbankruptcy.com)
- Sen. Durbin Finds Law Students Reluctant to Talk About Loan Debt (legaltimes.typepad.com)