Student Loan Bankruptcy

Louisville Kentucky Hardship Discharges

Until 2005, students could freely file bankruptcy and discharge private student loans.  Prior to 1998 student loans could be bankrupted 7 years after they became due.   However after 2005, the  bankruptcy options on student loans have been cut down to discharging the debts only if they can show they qualify for a hardship discharge or one of the other very few categories of discharging the debt.

Hardship means that the court must rule that repayment of the student loan will create an undue hardship on the debtor/borrower and his family.   Undue hardship is defined as the debtor cannot maintain a minimally adequate standard of living and repay the loan.   The Debtor has to prove that repayment and living at minimum standards are impossible and that this situation is unlikely to improve substantially over time.

Most judges use the undue hardship from the 1987 case argued before the U.S. Supreme Court in MARIE BRUNNER, v. the New York State Higher Education Services Corp.    Most defaulted student loans can be rehabilitated, consolidated, stretched out or discharged if the default is because of disability.   As long as a loan can be converted to an income based repayment loan then it is probably impossible to discharge.   Income based repayment loans can have very low rates of repayment.  However private loans cannot be converted to income contingent loans.

If the borrower does reach the “wage garnishment” stage, some comfort can be taken in the fact that federal regulations limit the amount of the student/borrowers garnishment to 10% of the total amount borrowed.  Before reaching that stage, other options are available including contacting various agencies who can offer workouts and student loan consolidation programs for loans in trouble, including programs based on income. Nolo Press and EdFund have information on student loans. Carreon & Associates provides information on defaulted loans and the Department of Education and Consumer reports provides facts on graduated payments.

To hardship discharge a student loan the debtor has to show that he has exhausted all of the other options and bankruptcy is his last resort.   One of the better arguments is to show that a partial discharge will allow the debtor to discharge the part of the debt that will make it an undue hardship and that the debtor will remain responsible for the remainder.   If the Debtor makes an all or nothing argument to the court he should have a very strong case to support undue hardship.

Nick C Thompson  Louisville Kentucky Student Loan Bankruptcy Attorney

Student Loan Default Rates

taken from Dept of Education

Student Loan Default rates have been very consistent for the last 20 years that they have reported.   Default rates for 4 years colleges average 25%, 2 year college default rates average 35% and private for profit colleges average 45%.   Some criticism has been made that some colleges encourage students to go into debt for degrees that fail to equip students to repay the debt and ballooning the default which ultimately taxpayers are forced to repay.   The lenders themselves have found such lending highly profitable and among the default charges include a 25% penalty when the lender first declares the loan in default similar to credit card over the limit fees.     

The draft FY 2008 national student loan cohort default rate is 7.2 percent. The draft rate increased from the national student loan default rate (FY 2007 official rate) of 6.7 percent and the national student loan default rate (FY 2006 official rate) of 5.2 percent.

The FY 2008 draft cohort default rates represent the percentage of borrowers in the Federal Family Education Loan and William D. Ford Federal Direct Loan programs who began repaying their loans between Oct. 1, 2007, and Sept. 30, 2008, and who defaulted on or before Sept. 30, 2009.

Each February, the Department releases draft rates for each institution. Schools have the opportunity to review their draft rates and may challenge the calculations. Draft rates do not result in sanctions and can change between February and the release of the official cohort default rate in September. Therefore, individual institutional draft rates are not made public.

Borrowers needing assistance in repaying their student loans can visit www.federalstudentaid.ed.gov or contact the holders of their loans to learn about repayment options. For help locating their loan holders, borrowers may access www.nslds.ed.gov or contact the Department’s Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243).

Additional information on the national draft Direct Loan Program and Federal Family Education Loan Program (FFELP) student loan default rates as well as aggregate national draft rates by type of postsecondary institution are attached to this announcement.

Attachments/Enclosures:

Comparison of FY 08 Draft CDR to Prior two official calculations, 45KB, 1 Page

Comparison of FY 08 Draft FFELP CDR to Prior two official FFELP calculations, 68KB, 1 Page

Comparison of FY 08 Draft FDSLP CDR to Prior two official FDSLP calculations, 41KB, 1 Page

New student loan legislation, signed in 2010 cuts out private-sector middlemen from offering federal loans as of July 1st, while increasing the federal grant programs.  Prior to this private banks offered both federal and private loans which confused borrowers.  The average debt among college students in 2008 is up to $23,200, nearly $5000 more than students graduating in 2004.  Bankruptcy hardship discharges are hard but not impossible to get for student loans and private student loans are often more likely to be discharged than income contingent and federal student loans. 

Students should maximize federal loans. Federal loans have fixed rates that do not rise with interest.  The fixed rates vary from 4.5% for students with a demonstrated academic need, to 6.8% for those who aren’t need based.  Also, federal loans offer a very flexible repayment plan, which can be important if you or your recent graduate are struggling to find a job that can pay the bills. Some plans are based on the student’s income. 

 Credit Union Student Choice program, offers private student loans with an average rate of 6.25% with zero origination fees.  There are also more regulations on the radar for Congress. There is a financial-regulation bill in Congress that calls for the formation of a Consumer Financial Protection Bureau that would have oversight over private student loans and other financial products to give borrowers more protection.

Prior to the bankruptcy law change in 2005, student loans owed to private non-profit institutions were dischargeable, but the 2005 bankruptcy law closed that exception and required students to prove that it would be a hardship to themselves and their dependents.  Currently, the only way to eliminate student loans in a bankruptcy is to file an adversary with the bankruptcy court and demonstrate that

1. The student borrower has made every reasonable effort to repay the debt
2. the student loans impose an “undue hardship” 
3. and the loans cannot be repaid presently or in the future without imposing and undue hardship.  

Bankruptcy cases that were discharged prior to 2005 can be reopened to file such undue hardship cases.   Be sure to see how to file for a student loan bankruptcy on our main website to see and download more information on how to hardship discharge student loans and we will attempt to also explain here step by step how to discharge student loans.