Bankruptcy

Filing Bankruptcy On Student Loans

In recent years, filing bankruptcy on student loans has become a major concern for many collegians who find themselves unable to meet financial obligations incurred in pursuit of a degree. By the time the average individual graduates from a public college or university, they will owe as much as $15,000 to $25,000 in government funded financing, not including monies borrowed from private lending institutions. Depending upon what region of the country in which they are enrolled, tuition can range from $3,000 to as much $8,000 per year. According to the U.S. Department of Education, almost 5% of graduates default on education loans within two years after commencement. The high cost of higher education, coupled with a dismal post-graduate job market, has placed many students in jeopardy of financial ruin before they can ever begin what they hoped would be lucrative careers.

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Student loan bankruptcy not only impacts graduates’ financial futures, but it hits taxpayers in the pocket, too. Statistics indicate that the average taxpayer pays nearly $400 annually in taxes due to student loan bankruptcy court and administrative costs. Parents who mortgaged their homes or co-signed for federal, state and private funding may also be at risk of financial failure in the event of default. Many undergraduates fail to plan a fiscal future and campus life offers little preparation. In the collegiate environment, basic amenities like food, clothing and shelter are taken for granted, and credit card abuse is rampant. By the end of freshman year, undergrads may have received countless offers from major credit card companies to apply for “plastic cash;” and most of them take full advantage of the privilege. If you want pizza, just charge it. Need books for Biology 101? Charge it. And the interest just keeps adding up. But as soon as the lights go dim on the commencement stage, reality hits and the fledgling scholar is left with nothing but a sheepskin and soaring debt. A hard-earned degree but lack of experience will only net an entry level, low-paying job, grossly inadequate to pay the compounded interest accrued on financing an education over the last four to six years. Graduates may feel that the only recourse is to file student loan bankruptcy, in hopes that their debts will be discharged before any substantial income can be earned.

During the 70s, filing bankruptcy on student loans to avoid repaying federal lenders became a widespread trend. By 1998, the federal government changed the criteria for discharging education debts to help stem this fraudulent and costly practice. While one can empathize with college graduates burdened with tens of thousands of dollars of debt, the fact remains that federally-funded education helps pave the way to future profitable careers. In the court of moral judgment, debtors who embrace filing bankruptcy on student loans have an ethical duty to honor their contractual promise, or vow, to repay the lender. Ecclesiastes 5:5 admonishes us, Better is it that thou shouldest not vow, than that thou shouldest vow and not pay.

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Since the government’s 1998 ruling, individuals seeking eligibility to discharge federally-funded student indebtedness must meet three stringent requirements: (1) Demonstrate to the court that repaying such debt would place “undue hardship” on them and their financial dependents and therefore, jeopardize the ability to maintain a minimal standard of living; (2) Petition and prove to the court that they would experience undue difficulty in maintaining financial solvency due to the exorbitant amount of time it would take to repay educational debts based on current income; and (3) Show documented proof that efforts have been made to repay monies owed for at least five years prior to filing student loan bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 further restructured the criteria for non-dischargeable student indebtedness, making it even more difficult for individuals to file student loan bankruptcy.

Alternatives for college and university graduates seeking to relieve federally-funded loan debt are few. Individuals may consider education loan consolidation whereby outstanding balances for several notes can be combined into one monthly payment. Former collegians may also opt to file Chapter 7 bankruptcy in order to have other forms of indebtedness discharged through regular proceedings. This would help alleviate their overall debt and free some funds which may then be applied to non-dischargeable student loans. Unfortunately, Chapter 7 proceedings may adversely affect a graduate’s ability to get future financing. Other alternatives include borrowing a lump sum from a bank or private lending institution to pay off outstanding education loans, or taking out a second home mortgage. Individuals may also enter into a repayment agreement with the U.S. Department of Education to settle defaulted notes. Bear in mind that the Education Department has the right to collect student debts by offset from Federal and state tax refunds and up to 15% of a federal employee’s disposable pay, until paid in full. Repayment agreements should be honored to the best of the debtor’s ability. One need not have a college degree in order to understand the serious nature of education indebtedness to the federal government. While filing bankruptcy on student loans seems to be an exercise in futility, there are alternative ways to find funding for repayment. A qualified financial consultant can help individuals determine the best course of action to relieve the burden of student loan debt and eventually enjoy the benefits of a good, quality college education.