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Help for Those Struggling with Student Loan Debt

Posted on 1/28/13 11:01 AM

On January 23, 2013 U.S. Senators Dick Durbin, Tom Harkin, and Al Franken re-introduced two pieces of legislation in an effort to restore transparency and fairness to the student loan process: the Fairness for Struggling Students Act of 2013 and the Know Before You Owe Act of 2013. If passed, the Fairness for Struggling Students Act of 2013 will make it easier for student loan borrowers to discharge their private student loan debt in bankruptcy.

Some Sobering Student Loan Statistics

According to the Consumer Financial Protection Bureau, student loan debt is more than $1 trillion. More sobering facts from the Center for American Progress include:

  • The cost of earning a college degree has increased more than 1,000% in the past 30 years
  • Two-thirds of students who earn a 4-year college degree carry student loan debt of about $25,000
  • 1 in 10 student loan borrowers now owe more than $54,000

Some are predicting that student loan debt could be the next mortgage crisis, having a negative impact on the U.S. economy by preventing student loan borrowers from purchasing homes, cars, and other goods that are important to the growth of the national economy. Furthermore, relatives such as parents and siblings who co-signed for these student loans are also negatively impacted by being saddled with making payments for years on these loans.

The Hurdle of Discharging Student Loan Debt

Since the 1970’s, federally-guaranteed student loans have been treated as not dischargeable in bankruptcy with a few exceptions. When the new bankruptcy law went into effect in 2005, private student loans were included as not dischargeable as well.

While student loans cannot generally be discharged in bankruptcy, there is an exception if a debtor can prove that it would be an undue financial hardship for the debtor to repay the student loan. To prove “undue hardship,” bankruptcy courts use the “Brunner test” to determine if a student loan should be discharged in bankruptcy. This test is named after the 1987 U.S. Court of Appeals decision in Brunner v. New York State Higher Education Services Corp.  According to the Brunner test, a debtor most prove all the following:

  • The debtor cannot, based on current income and expenses, maintain a minimal standard of living for himself/herself and his/her dependents if forced to repay the student loan
  • The debtor’s current financial situation will likely continue through most of the repayment period
  • The debtor has made a good faith effort to repay the student loan

While most of the courts use the Brunner test, they may apply different formulas when determining whether undue hardship exists.

The Fairness for Struggling Students Act of 2013

This proposed Act would treat private student loans the same as other types of private debt in bankruptcy, making private student loans dischargeable in bankruptcy. But the Act would not apply to federally-guaranteed student loans. There are differences between private and federal student loans:



  • Fixed interest rates
  • Variable, uncapped interest rates
  • Deferment and forbearance for economic hardship
  • No deferment or forbearance for economic hardship
  • Repayment options available (i.e. income-based)
  • No repayment options available

Importance of Having a Bankruptcy Attorney Help with a Student Loan Discharge

It’s important that you consult with a bankruptcy attorney if you are burdened with student loan debt. The bankruptcy attorney can review your case to determine if undue hardship applies. A separate petition will have to be filed for your undue hardship claim. The attorney can also represent you in your claim by filing the extra paperwork and presenting evidence in court.

A bankruptcy attorney can also review your case to determine if you have other defenses to repaying your student loan. This is especially true if you attended a vocational or trade school. You may have a defense based on breach of contract, unfair or deceptive business practices, or fraud.

Use our free Attorney Locator to find a bankruptcy attorney in your area. We also have consumer resources to help guide you through the bankruptcy process.




Tags: Student Loans and Bankruptcy

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