Allowing Bankruptcy for Student Loans
The recent 2019 student loan statistics are a clear indication of how serious the student loan debt crisis has become in the United States. Statistics reveal that more than 44 million Americans across all age groups and demographics have hefty student loans. It is for this reason that states should allow bankruptcy for student loans to help ease the burden. If you are drowning in student loan debt and you do not have a way out, you may consider declaring bankruptcy. It is therefore essential to understand the current student loan debt crisis in the U.S., bankruptcy options for student loans, consequences of not repaying student loans, and the efforts by various parties to change the bankruptcy law relating to student loans.
Student Loan Debt in the United States
Student loan borrowers collectively owe $1.5 trillion in student loan debt. In the consumer debt category, student loan debt is the second highest behind mortgages. It is even much higher than all credit cards and auto loans. States with larger populations bear heavier loan debt burdens. These states include California, New York, Florida, and Texas. The four states represent more than twenty (20%) percent of U.S. student loan borrowers. Economists warn that the heavy loan burden on borrowers is a threat to the economy as a whole.
The former student loan ombudsman at The Federal Consumer Financial Protection Bureau, Seth Frotman, expressed his concerns on the growing student loan crisis. He stated that the scary thing was that there was no plan to address the millions of borrowers with massive loans or a plan to stop the growing debt crisis. In his further statement, Frotman pointed out that student loan borrowers in the US face the same kind of treatment as irresponsible parents or tax cheats. The borrowers face harsh treatment and all their benefits, including wages, tax refunds, and in some cases, social security benefits are seized to repay outstanding student loans. Frotman argues that student loan borrowers ought to have a second chance in bankruptcy.
Many students fall into the trap of thinking that loans will make their lives more comfortable, but it ends up costing them a lot. Student loan debt has recorded a growth of over 157% since the great recession. Of the total household debt in the U.S., student loan debt is the fastest growing portion. 65 percent of the graduates from nonprofit colleges have debts. According to an estimate made by the financial aid expert Mark Kantrowitz, parents and students with loans owed an average of $36,888 at the time of graduation in 2018. This average debt loan was more than double the average student loan debt in 1993. According to 2018 statistics, one (1) out of every ten (10) students with loans was either late or completely defaulted their loan payments. Student loans have recorded the highest delinquency rate of all household loans surpassing mortgages, credit cards, and auto loans.
Bankruptcy for Student Loans
Discharging student loans in bankruptcy is a very challenging process, but with the guidance of an experienced bankruptcy lawyer, it may be possible to file for bankruptcy on other debts. Although it is not possible to discharge your student loan, it requires navigating an intricate legal system to find other solutions. Still, according to financial experts, it is theoretically possible to get your student loan removed, but it is not a normal bankruptcy process. It is incredibly hard.
According to a study conducted at The University of Pennsylvania Law School, only 0.1 percent of student loan borrowers who declare bankruptcy attempt to have their loans discharged. Of this fraction, about forty (40%) percent are successful. Therefore, only 0.04 percent of the people who have filed for bankruptcy and applied to have their loans discharged partially or entirely were successful. These statistics are evidence that it is possible to have your student loan removed. However, the legal requirements for the discharge are discouraging.
The student loan debt burden is particularly heavy on the poor who may have invested so much in education. However, they do not reap the fruits of their investment as they end up failing to finish their degrees or fall prey of for-profit institutions. While filing for bankruptcy, you have to prove that paying the student debt will exert undue pressure on you and your dependents.
Courts employ various tests while determining if a borrower has shown undue hardship. According to the financial author, Congress did not define what undue hardship is, and instead gave the courts a task to establish undue hardship. Bankruptcy courts have the liberty to use two different types of tests to determine if an individual is experiencing undue hardship. The two tests are the Brunner test and the Totality of the Circumstances test. The standard test is the Brunner test. Under the Brunner test, you will have to prove that:
- Based on your current income and expenses, you cannot maintain minimal standards of living for you and your dependents if you pay the student loan
- Additional circumstances exist which indicate that your financial condition is likely to persist for a significant part of the period you are repaying your student loan
- You have made some effort to repay your student loan from the income you earn
Your student loan may be canceled if you successfully prove undue hardship. By filing for bankruptcy, you get automatic protection from all recovery efforts for your loan. You will at least enjoy some peace of mind until your bankruptcy case is concluded or until the creditor gets approval from the court to start demanding for loan repayment.
To have your student loan discharged through bankruptcy, you have to file an adversary hearing. During this hearing, you will claim that paying the student loan would create an undue hardship for you.
Did Student Loans Ever Qualify for Bankruptcy
Before 1976, you could easily discharge your loans in bankruptcy in the United States. Congress then changed this law; student loans were dischargeable only if you had repaid the loan for five (5) years. Later on, the period of repayment was extended to seven (7) years before a student qualified to file for bankruptcy. In 1998, Congress removed the ability to discharge student loans unless students could prove undue hardship. In some cases, the courts demanded that borrowers demonstrate a certainty of hopelessness, which is a very high standard to achieve. In 2005, Congress applied this rule to private loans as well.
What Happens If You Fail To Pay Your Student Loan Debt?
Failure to pay your student loan debt will make you a candidate for a modern-day form of debtors’ prison. Interests keep rising, so the balance of your outstanding debt will keep growing. If you are lucky to benefit from federal income-based repayment options, your debt may be canceled after twenty (20) to twenty-five (25) years. However, you will most likely face a tax bill for forgiveness. If you default, you risk ruining your reputation. In the U.S., nearly five (5) million people have defaulted their loans. As a result, they suffer from a tarnished credit record; this may affect all prospects of acquiring a job and homeownership plans.
What Has Changed Concerning Repaying Student Debt?
The Wall Street Journal interviewed more than fifty (50) current and past bankruptcy judges who have served under both Democratic and Republican Administrations. It was evident that some judges are more open to assisting student loan debtors. However, that does not mean that there are no barriers when filing for the discharge of student loans. Some judges, however, have devised some ways to help ease the burden for students, which include:
- Appealing to bankruptcy attorneys to offer their services to debtors at no cost
- Eliminating any future tax bills that may be attached to loan reliefs provided to students or cancellation of debt after 25 years as provided under federal student loan repayment programs
- Suspending and canceling student loan debt from unaccredited institutions
The tactics recommended by the bankruptcy judges may be favorable to student loan borrowers but face some criticisms. Critics argue that it is not the duty of the judges to change the existing law, and instead, they should leave the task to Congress.
Pursuing Student Loan Discharge in Bankruptcy Proceedings
It is incredibly challenging to meet the standard of undue hardship, making it necessary to consult a bankruptcy lawyer. The lawyer will assess your unique situation and see if there are some grounds for seeking loan discharge. Even if you meet the undue hardship standard, additional work on top of the standard bankruptcy proceedings is required.
According to the financial author mentioned previously, seeking a student loan discharge is not as easy as filing for bankruptcy; it is an adversary proceeding enveloped in a bankruptcy proceeding. Under certain circumstances such as terminal illness or permanent disability, you would be able to claim student loan discharge easily. There are three (3) likely outcomes to the court proceedings:
Full Discharge – If the court decides to discharge your debt fully; you will not make further payments towards the loan.
Partial Discharge – Based on your circumstances and your ability to pay, your loan may be partially discharged requiring you to pay a portion of your student loan debt. For example, if you have both private and federal student loans, the court may decide to discharge the private loans while you pay the federal loans.
No Discharge – Under no discharge ruling, you will have to pay all your student loans. However, the court may make some amendments on aspects such as the interest rate of the loan.
Student Borrower Bankruptcy Relief Act of 2019
Lawmakers came up with a bill that intends to make it easy for student loan borrowers to file for bankruptcy and cancel their debt. The relief act is supported by 14 Democrats, one (1) Republican, and one (1) Independent. One particular senior policy associate at The Center for Responsible Lending supports the bill. She points out that it is vital to offer a pathway to vulnerable student loan borrowers, who are unable to pay their loans, to re-establish their financial responsibility.
On May 9, 2019, Washington U.S. Senators Elizabeth Warren (D-MA) and Dick Durbin (D-IL) together with U.S. representatives John Katko (R-NY-24) and Jerrold Nadler (D-NY-01) introduced a bicameral bill. The bill sought to give Americans facing massive student loan debts a chance to access meaningful bankruptcy relief. The aim of the Student Borrower Bankruptcy Relief Act of 2019 is to override the part of the law relating to bankruptcy that renders federal and private student loans non-dischargeable. The bill seeks to allow student loans to be treated like other forms of consumer debt.
In reinforcing the bill, Durbin outlines that although filing for bankruptcy should be the last resort, student borrowers without a realistic path to repay burdensome student loans should file for bankruptcy. He observes that the U.S. currently faces a debt crisis, and it is time to restore meaningful availability of bankruptcy relief for student loans.
Warren states that long before joining the Senate, she fought to keep student loans dischargeable in bankruptcy. However, Congress always chipped away at the crucial protection of student loan borrowers. She asserts that the bill will restore this protection.
Nadler observed that Americans are facing massive student loan debt that prevents them from buying homes and thus hinders them from living the real American dream. He pointed out that it was necessary for Americans to invest in their education and then live quality lives without the heavy burden of debt on them.
John Katko, R-New York states that the bipartisan legislation will give Americans struggling financially an option to discharge their student loans during bankruptcy.
Several consumer advocacy groups, including The Center for Responsible Lending, The National Consumer Law Center, and Americans for Financial Reform applauded the new bill.
The Future of Student Loan Bankruptcy
It is clear that the proposal to allow bankruptcy for student loans is far from completion. While numerous lawmakers and advocacy groups are in support of bankruptcy for student loans, critics are equally enthusiastic in ensuring that student loans remain nondischargeable. The Congress remains adamant about restoring bankruptcy for student loans. However, there is still hope for you if you are struggling with a student loan debt. Under the guidance of a bankruptcy lawyer, you can take the first step towards having your debts discharged. With the ongoing intense debate and proposals regarding student loan debt, bankruptcy for student loans may soon be restored. Failing to allow bankruptcy would only make the already severe debt crisis in the United States worse. According to the recent statistics from the Institute for College Access & Success, the United States’ student loan balance may exceed two ($2) trillion by 2022.