Student Loans Discharged Under Bankruptcy
Student borrowers have long been under the impression that federal student loans may not be discharged through bankruptcy due to poor legal advice. The truth behind the matter is student loans can be discharged if borrowers are able to demonstrate “undue hardship.”
The U.S. Bankruptcy code under the “undue hardship” provision states student loans may not be discharged unless “excepting such debt…would impose undue hardship on the debtor and the debtors dependents.”
Come to find out, getting a court to rule student loans as an “undue hardship” is not as difficult as previously believed.
Steve Rhode, a consumer debt expert and who is known as the “get out of debt guy,” states, “The general perception is that federal student loans are not dischargeable in bankruptcy. Obviously that assumption is not true because an allowance exists for discharge in the case of undue hardship. But many incorrectly assume that threshold is impossible or nearly impossible to accomplish.”
To support his claims, Rhode shines light onto a 2011 paper published in American Bankruptcy Journal, titled An Empirical Assessment of Student Loan Discharges and the undue Hardship Standard written by Professor Jason Iuliano and former Harvard Law School Alumni. According to Iuliano’s research, discharging student loans is often applied in an inconsistent manner and fails in the discharge process due to lack of preparation by those filing. In his abstract, he finds judges discharge close to 40 percent of federal student debt to those who file. Factors circling successful discharge are those less likely to have steady or secure employment, more likely to exemplify a medical hardship, and who have low annual incomes before filing for bankruptcy.
Iuliano’s findings also demonstrate that a respective 0 .1 percent of students attempt to discharge federal student loans during bankruptcy and are just as successful in the process without attorneys as those who have hired legal help. Also concluded in his research is 25 percent of those filing bankruptcy with student loans were granted full discharge.
Within research performed by Rhode, he concludes 47 percent of student borrower’s attained full discharge with 33 percent of receiving a more suitable loan bill or better repayment terms.
The Obama administration has implemented a newer approach to paying back student loans incorporating what is known as an Income-Based Repayment Plan and forgives balances after 20 years. It seems a more reasonable approach for congress to take is to ensure schools receiving Title IV loan money take on some of the responsibility of student payment, bankrupt or not.
Students have been long encouraged to borrow heavily for degrees due to the rising cost of tuition without the promise of finding secure employment after graduation to pay back debt. With a new light shining onto bankruptcy options, we may begin to see more student borrowers filing under “undue hardship.”