Student loan debt has hit more than $1.3 trillion in the United States, and the average Class of 2016 graduate is carrying $37,172 in student loans, according to a recent report from Forbes. The same report found a total of 44.2 million Americans carrying some amount of student loan debt.
What these numbers do not convey is that many student loan debt holders are struggling to make not only their student loan payments, but also pay their other bills, including mortgages, car loans, and credit cards. Many graduates may consider bankruptcy at some point in their lives, but they may be wondering if their student loans can be discharged through bankruptcy.
Student Loans and Bankruptcy
It is extremely difficult to have a student loan discharged in bankruptcy, as you have to prove that your student loans are an “undue hardship” on you and your dependents. It is up to the court to decide whether you can pay back your student loans, and most use the Brunner Test to make this determination. This test basically says:
- You will not be able to maintain a basic standard of living if you have to pay back your student loans
- Whatever financial hardship you are facing will last for a large portion of the repayment period
- You have made an effort to pay your loans before filing for bankruptcy
While this may sound like your situation, the criteria the court uses to prove this hardship is unforgiving and inconsistent from one court to another. For example, one court ruled that a married couple could discharge their student loans, as they both worked in low-paying but worthwhile careers. The wife was a teacher’s aide, and the husband worked with emotionally disturbed children. However, other courts do not rule sympathetically in similar situations, and have told petitioners that they need to seek higher paying jobs. In other instances, people who were struggling with mental illnesses, such as alcoholism, have been able to prove their problems will persist into the future. In other courts, though, these sorts of petitioners are denied. Whether your bankruptcy can be discharged is automatically considered by the court when you file your bankruptcy petition.
Whether your debt is discharged, filing for bankruptcy can help with your student loans in at least one regard, even if your debt is not discharged. You will be protected from collection actions on your debts while you are in the bankruptcy process, which means your student loan lender cannot garnish your wages or put a lien on your bank accounts for amounts owed.
If you do want to pursue bankruptcy, it is imperative you call an attorney to discuss the pros and cons of such a decision. Not only will a bankruptcy remain on your credit report for up to 10 years, there are also fees associated with filing. Some of your assets may also be at risk, if a court rules that you must liquidate them to pay your creditors. A lawyer will help you navigate the process and protect your interests.
Alternatives to Bankruptcy
If you do not qualify to discharge your student loans in bankruptcy, you do have other options for repaying the debt. For a short-term financial hardship, you can contact your servicer to see if you qualify for a financial hardship deferment or forbearance. While these are not long-term solutions, they can temporarily halt your payments, and you will not go into default.
You can also switch your repayment plan to one of three income-driven repayment plans, Pay as You Earn, Income-Based, or Income-Contingent. While each of these are slightly different, they all work in a similar way. Your payment will be determined by your income, which means you will pay between 10% to 15% of your discretionary income. This will make your payment much lower than a 10-year standard or 20-year standard repayment plan. Depending on your income, you may even qualify for a $0 monthly payment. Under these plans, any remaining balance will be forgiven at the end of your repayment period, which is either 20 or 25 years.
Avoid Defaulting on Your Loans
No matter which solution you choose, it is imperative you contact your student loan lender before you fall behind on your payments. Your loan servicer will report your account as delinquent to the three national credit bureaus if your payment is 90 days late, and if you continue to be delinquent, you will be considered in default. If you default on your student loans, you will lose eligibility for deferment, forbearance, any repayment plans, and future student loans. Also, if your student loans go into default, your credit score will be negatively impacted, and it will be difficult, if not impossible, for you to qualify for mortgages, car loans, or credit cards.