A growing concern for students both young and old, outstanding school loan payments have risen to critical mass in this country. Learn ways to help alleviate the stress of student debt.
In 2014, total outstanding student loan debt in the U.S. rose to nearly $1.2 trillion, according to the New York Fed. In the fourth quarter alone, the average student loan balance was $26,700. While overall debt attributed to school loans has grown notably in the last 10 years, the financial burden of school debt has peaked the fastest among Americans age 60 or older, people near or in retirement. In 2014, that amounts to $204 billion borrowed or co-signed by older people to help a child or grandchild pay for college, or to finance their own education to finish an undergraduate degree, earn a graduate degree or switch vocations.
Student Loan Categories
Loans for education are awarded for use in two-year and 4-year programs, undergraduate, graduate and doctorate programs, colleges and universities, technical schools as well as internet-based learning institutions, truck driver training and the like. Student loans are categorized as backed by the federal government or through a private lender. Each has specific requirements for repayment. Essentially both types of student loans are treated the same way in bankruptcy courts.
Discharging Student Loans in Bankruptcy
When attempting to discharge student loan debt in bankruptcy, a Debtor must file a separate Court action within the case called an Adversary Proceeding. During this litigation process the Court will consider what you can reasonably afford to pay now and in the foreseeable future. In certain cases. The Court could, for example, find that that out of $50,000 of student loan debt that you can afford a repayment plan over a period of time for $20,000 of the debt, with the remaining $30,000 to be forgiven. The details of the repayment plan will be determined by earning potential, based on number of years that the court can reasonably foresee your ability to pay.
To wipe out student loans in bankruptcy, you must prove to the court that paying them would cause you undue hardship, which is defined by the Brunner Test in most bankruptcy courts. The Brunner Test includes three elements:
- Cannot maintain a minimal standard of living. Based on current income and expenses, you cannot maintain a minimal standard of living for your family if a student loan is repaid.
- Situation will continue. Your situation is likely to continue for most of the repayment period.
- Good faith effort to repay. You made a good faith effort to repay the loans, including federal repayment plans if you have a federal student loans.
The Brunner Test defines significant, ongoing hardship that contributes directly to your ability to make payment towards student loans, whether it be disability, age or insufficient income for basic needs along with student loan repayment.
Recent cases in the Seventh (Krieger v. Educational Credit Management Corp., 713 F.3d 882 (7th Cir. 2013)) and Ninth (Hedlund v. Educational Resources Institute Inc., 718 F.3d 848 (9th Cir. 2013)) Circuit Court of Appeals may make it easier for people with student loan debt to meet the three elements of the Brunner Test. The Seventh Circuit found Ms. Krieger’s age and lack of success in the job market over 10 years to be very important in demonstrating undue hardship. The Ninth Circuit cited Mr. Hedlund’s efforts to obtain employment, maximize income and minimize his expenses. Both courts have taken a more liberal approach to some of the Brunner elements, loosening up the rules so to speak, which could make it easier for your bankruptcy lawyers to wipe out some or all of your student loan debt in bankruptcy. Essentially, these cases have put more power back in the hands of a bankruptcy judge actually trying facts rather than an appellate court’s ability to overturn those standards. It is a move in favor of debtors that now allows bankruptcy lawyers to consider the dischargeability of student loans for more people.
Say you have $75,000 in student loan debt and $40,000 in medical and credit card bills. A Chapter 13 or reorganization bankruptcy may help manage and discharge a significant amount of the general unsecured debts and keep student loans out of collection status for a period of time, usually a repayment delay of up to five years. Student loan companies along with all other types of creditors can’t come after you for money through any kind of judicial process, stopping student loans dead in their tracks. This is actionable in a relatively short time frame, and gives you an opportunity to get your finances back on track, eliminating other types of debt as you move a little further along in your career, with the potential for an increasing income. If certain circumstances occur, such as your school closes prior to you receiving a degree or certificate or graduation, your student loans may be dischargeable in bankruptcy. Without further action from the Bankruptcy Court, however, student loans remain non-dischargeable at the end of a Chapter 13 plan.
Helping Older People Cut Student Debt
In addition to Chapter 13 or reorganization bankruptcy plans, people who are approaching retirement (and even those who aren’t) and are carrying debt due to student loans can benefit from the following advice:
- Make loan payments on time. Experts say that students who don’t postpone payments, keep track of their payment, stay in touch with their loan officers and graduate increase their chances of successful repayment. If your loan goes into default, the government can garnish your wages, withhold your tax refund or take a portion of your Social Security benefits.
- If you qualify for an income-driven repayment plan (“Pay as You Earn”, income-based and income-contingent), you can lower monthly payments on federal student loans, based on 10 to 20 percent of discretionary income. Any remaining balances on your federal loans will be forgiven after 20 to 25 years as long as you’ve made your payments on time.
- Federal PLUS loans for a child or a grandchild can make you eligible for income-contingent plans, if the loan is consolidated. For private student loans where you co-signed for you kids, try to negotiate a lower payment with the lender.
- If you have excellent credit, refinancing student loans may help lower interest rates.
Call Indianapolis Bankruptcy Lawyers – Sawin & Shea – 317-759-1483
If you are considering bankruptcy and have student loan debt, give our Indiana bankruptcy lawyers a call and get an assessment of your chance of discharging school loans. We will provide you with a free evaluation of your case and educate you on all the options you have as you look to a debt free fresh start in life.