Let’s face it, when student loans were made nearly impossible to discharge in bankruptcy, lenders realized they could hand over as much money as they wanted to to kids with no risk. Schools could then charge whatever exorbitant fees they could convince students to sign up for and could give them an altogether useless degree in underwater basket weaving. Since parents have ritualistically repeat the mantra, “Go to college.” since the child was a mere babe, it’s easy to see why our young graduates owe more than $1 trillion dollars in total.
Rule 11 U.S.C. 523 (8) governs the discharging of student loans in bankruptcy cases. In summary, it requires that an undue hardship to the debtor or their dependent would occur were the loan(s) not discharged.
Judges have had fun in deciding what an “undue hardship” is, but have basically boiled it down to the following: An undue hardship occurs if a debtor can show that they (1) cannot maintain, based on current income and expenses, a “minimal” standard of living for themselves and their dependents if forced to repay the loans, (2) additional circumstances exist indicating that the debtor’s financial situation is likely to persist for a significant portion of the repayment period for the student loans, and (3) they have made good faith efforts to repay the loans. As each of these three prongs must be proven to discharge the debt, this is a hefty standard. This has been made especially difficult since the passage of the 2007 “College Cost Reduction Access Act“, which created the Income Based Repayment plan. Income Based Repayment reduces Federal Student Loan payments to 15% of the difference between the debtor’s gross income and 150% of the poverty line. Without forcing you to do complicated mathematics, I will say that it makes student loan payments very manageable. As a result, hardships are impossible to prove if the loans can qualify for the Income Based Repayment option. Income Based Repayment allows you to pay a fraction of your income for ten to twenty-five years depending on the type of employment you have. At the end of the repayment period, the U.S. Government discharges your remaining debt, i.e. pays your loan.