The Widespread Problem of Mounting Student Debt

Upon graduation, today's students are facing a debt crisis unlike any generation in history. In 2009, those receiving a four-year degree had racked up an average of $24,000 in student loans. Add to that figure the outliers, and the students who continue their education in pursuit of a graduate or professional degree, and debt load can reach truly staggering figures.

Especially in a slow economy, paying off even modest debts can be a hardship. For recent grads with particularly large outstanding loans, the outlook may seem grim: bankruptcy usually cannot discharge student debt. But, even when bankruptcy is not viable, there may be other options available to those drowning in debt.

Student Debt and Bankruptcy

Although exact figures are hard to come by, students seeking higher education collectively borrow approximately $100 billion every year, and the total outstanding student debt load nationwide was estimated to be $833 billion in 2010. A high proportion of borrowers eventually default on such loans, a prospect that can have grave consequences (for example, in some instances defaulters are penalized by having their professional licenses revoked, which could mean the end of a career). Yet, despite the student debt crisis, many conventional borrowing safeguards are not extended to educational loans.

Truth-in-lending laws do not apply to some types of student loans, and lenders can dip into wages, disability payments, or even tax credits to collect outstanding amounts. Perhaps most significantly, students' debts usually cannot be discharged in bankruptcy.

So why has bankruptcy generally been closed off as an avenue to eliminate student debt? In decades past, some students would file for bankruptcy immediately after graduation and before starting a job, therefore eliminating their debt at a time when they had few assets. But, in 1998, taking advantage of this loophole became much more difficult. Today, student loan debt is considered a "non-dischargeable" debt.

There is one exception to the general rule that student debt survives bankruptcy. If a bankruptcy court finds that repaying student loans places "undue hardship" on you or those who are financially dependant on you, the debt may be judicially eliminated.

There are three criteria you must meet to qualify for the undue hardship exception:

1) It is currently impossible for you to maintain a minimal standard of living while making loan payments.

2) Your situation is not likely to improve (i.e., you will not at some point be earning enough money both to make payments and support yourself).

3) You made legitimate efforts to pay off your loans prior to filing for bankruptcy.

Courts very seldom approve discharges of student loans for undue hardship, and unless you have a permanent disability that prevents you from working, it is nearly impossible to eliminate your debt through this exception.

Other Alternatives

Bankruptcy rarely brings any relief for those seeking to completely discharge student debt. But, there are other avenues that can be pursued. In a Chapter 13 bankruptcy proceeding, your loan payments and other bills can be consolidated, which may lower your monthly payments, and will stop collection actions from lenders.

In addition, you may be able to challenge your loan balance in a Chapter 13 bankruptcy (since loans are often transferred between lenders, sometimes it is not entirely clear exactly how much is owed; a judge can determine the amount of debt with accuracy and make it binding on all parties). There are, however, certain requirements for Chapter 13 bankruptcy, such as owing less than a ceiling amount and having a stable income.

Another option that can often help alleviate debt load is negotiating different repayment options with your lender. Payments can be spread out over a longer period of time or deferred until your earning potential increases, and you may be able to consolidate multiple loans at lower interest rates. Lenders are more receptive to making such concessions than you may expect; after all, they would rather help a borrower create a workable repayment plan than face default and the accompanying potentially expensive collection actions or possibly an inability to collect at all.

If you find yourself overwhelmed by student debt, contact an experienced bankruptcy attorney. Your attorney can determine whether you may qualify for an undue hardship discharge, and will help assess other options. An attorney can handle your Chapter 13 bankruptcy case and negotiate directly with lenders to secure a repayment plan that works for you.

Burdensome debt is never easy to face. But, with the proper assistance, you can be on your way to a more stable financial future.