It’s more than ironic – three of my four Indiana bankruptcy law offices are in big college towns (Indianapolis, Bloomington, and Anderson), and yet student loan debt, a rapidly growing problem, is mostly non-dischargeable in bankruptcy!
What I’ve been finding is that, while student loans seem to be the main factor driving younger and younger people to seek bankruptcy protection, that’s not all because of student loans, but because students are doing what the Butler Collegian calls “putting college on a tab”, using credit cards to pay for tuition, books, and other direct college expenses.
The federal government, realizing what a big problem student debt is becoming, created direct consolidation loans that allow borrowers to combine their federal education loans into a new, fee-free loan with four different flexible payment plans and renewed deferment opportunities.
On July 1st 2009, a new Income Based Repayment Program went into effect, allowing graduates to pay no more than 15% of their income towards student loan repayments. Those with moderate to low incomes will be able to pay much less, and in some cases, to defer paying anything at all. These concessions apply only to government loans, not to private loans.
With job markets shrinking, preventing employers, parents, and relatives from helping graduates who are behind on their loan payments, the student loan default rate is rising rapidly. Debate continues to rage about treating student loans and mortgage loans the same as other forms of consumer debt when it comes to bankruptcy, but no comprehensive legislative relief for student loan problems has been passed.
The way the law operates now, student loans are non-dischargeable in bankruptcy unless substantial hardship can be established. That in itself is complex, involving documented proof that efforts have been made to repay the student loans for at least five years leading up to filing bankruptcy, proof of severe physical disability, or proof of dependents’ needs. The bottom line is that the debtor has to prove he or she could not maintain even a minimally adequate standard of living and still repay the loan.
So, how am I able to be of help? Bankruptcy helps eliminate other debts, freeing up money to repay the student loans. In the case of Chapter 13 bankruptcy, bankruptcy buys time to spread out payments to other creditors.