Student Loan Bankruptcy Options
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- Last Updated: Tuesday, 09 March 2021
Student Loan Discharge
Student loans are unsecured, meaning there is no collateral, such as a car, which can be repossessed to help repay the money owed. It's not possible to unlearn what has been taught, and no one can recapture a college diploma. But with the rising rate of bankruptcies in the United States, it was too "easy" to simply declare bankruptcy and have student loans discharged.Bankruptcy Law Changes
Hardship Rules
Borrowers do have the option of making a hardship request. After the initial bankruptcy proceedings are over, an adversary proceeding can take place in court to decide if the filer meets all three of the hardship rules or tests.
- If forced to repay the student loan, the filer would not be able to maintain a minimal standard of living.
- There is evidence this financial hardship will continue for a significant period of time over the remaining term of the student loan.
- A good faith effort was made to repay the loan before filing for bankruptcy. Effectively, this means the borrower had been faithfully repaying the college loan for a minimum of five years.
Repayment Relief
In addition to bankruptcy, there are actually five additional options former students have when seeking relief from their loans, including:- Deferring Payment
- Forbearance
- Forgiveness
- Flexible Repayment Options
- Consolidation
Deferring a Student Loan
The first option borrowers have is called deferment. This process involves suspending, or deferring, the student loan payments for specified periods of time, and under specific conditions. For example, deferment might be possible due to unemployment, disability, or military service. This topic is discussed at length in our article: Student Loan Deferment.Forbearance
Instead of declaring bankruptcy, there is another option known as forbearance. This is the temporary postponement of payments, or a reduction in payments, for a specific period of time. This arrangement is worked out with the lender, or creditor, and is in-effect until the financial difficulty is over.Forgiveness Programs
Perhaps the most desirable of all alternatives to bankruptcy would be to have a loan forgiven or discharged. A loan forgiveness program will repay a percentage of a former student's educational debt in exchange for work in a designated job. Unlike service payback programs, which pay for educational expenses while the student attends college, forgiveness programs payoff a loan after the borrower starts working. Once again, there is an entire article dedicated to this topic: Student Loan Forgiveness. That article talks about the various programs that exist, as well as how to qualify.Repayment Options
The fourth option involves taking advantage of one of several loan repayment programs. Options include both a graduated and income sensitive payment program. These plans allow borrowers to increase their monthly payments over time, or have them automatically adjusted as family income increases or decreases. These arrangements are covered more thoroughly in our article: Student Loan Repayment.Loan Consolidation
Finally, it might be possible to find relief from high monthly payments by consolidating loans. As soon as a student graduates, or drops below half time enrollment status, they are eligible to consolidate any Direct or FFEL Loans that are outstanding. Anyone that has been delinquent in paying back federal student loans may not be immediately eligible for loan consolidation. If that is the case, then contact the lender to find out what corrective actions can be taken to become eligible once again. More details about this alternative can be found in our article: Student Loan Consolidation.Federal Student Aid Ombudsman
The Department of Education has established an ombudsman to help anyone thinking about declaring bankruptcy as a result of their student loans. This office has checklists and tools that can help figure out the best approach to deal with a financial crisis. Think of the Ombudsman as a consumer advocate for student loans. For more information about this service, just visit the FSA Ombudsman website.About the Author - Student Loan Bankruptcy Options
