June 15, 2013
Surviving Student Loan Default
Bankruptcy proceedings a viable option
Rising student loan delinquencies have become worrisome, with banks writing off $3 billion in student loan debt during the first two months of this year alone. By February, about 850,000 students had defaulted on their loans in 2013, according to a March article on the Debt.org website.
The prevailing reason for defaulting on a student loan is that the individual could not find a job commensurate with his or her education and either is not working or has accepted a low-paying job that puts only food on the table and a roof over their heads.
Another reason is that college costs have increased by 1,120 percent since the 1980s, demanding that students go further and further into debt.
“College tuition becomes more expensive every year, median income levels continue to fall, and hiring of young graduates remains tepid, especially for those with little experience,” states a March article on the Money Morning website.
Remedies on the Horizon
Few options for redress are available when defaulting on a student loan, and in the past, bankruptcy was not an option because of the language in the Bankruptcy Abuse Prevention and Consumer Protection Act.
“Conventional wisdom says that it is nearly impossible to obtain a discharge of student loan debt in bankruptcy. Indeed, Section 523(a)(8) expressly excepts student loans from discharge,” unless the Principal “undue hardship” can be used successfully, according to a May 1 article on the Mondaq website.
There are two recent court cases where the defaulters were successful in having their educational loans either fully or partially discharged.
Law blogs are referring to the April 10, 2013, Seventh Circuit Court’s decision in Krieger v. Educ. Credit Management in which the court discharged a $25,000 student loan because the defaulter, 53-year old Ms. Krieger, lived on government subsidies and her future looked bleak.
According to the opinion of the U.S. Court of Appeals, there are three factors that must be met before a student loan may be discharged. First, the defaulter and his or her family would have to live under poverty-level circumstances when monthly payments of the debt are included in their expenses. Secondly, this circumstance is highly likely to continue for the term of the loan, and lastly, the defaulter “has made good faith efforts to repay the loan.”
In a Court of Appeals decision, filed May 22, defaulter Michael Eric Hedlund, who owed $85,000 for attending law school, met the undue hardship rule and was forgiven $55,000. In the end, despite an appeal by the Pennsylvania Higher Education Assistance Agency (PHEAA), the Seventh Circuit upheld the first ruling, given that Hedlund had made good faith efforts to repay the loan.
To succeed in having student-loan debt canceled under the undue hardship doctrine, the debtor bears the burden of proof, which “involves a public, intimate, and downright embarrassing examination of your finances,” suggests a June 5 Money Morning article.
The Student Loan Tracker website lists over a dozen bills addressing student loans that are slowly making their way through Congress, with many stuck in a committee, some since 2009. According to the website, one of the bills getting the most attention right now is Sen. Elizabeth Warren’s (D-Mass.) bill “to give student loan borrowers the same interest rate as ‘Too Big To Fail’ banks.” The bill was referred to committee in May.
Reps. Steve Cohen (D-Tenn.) and Danny Davis (D-Ill.) introduced a bill in February that calls for private student loans to be treated like private debt during bankruptcy proceedings, but reports say the bill has almost no chance of being enacted. It was referred to committee in February.
The student loan delinquency issue will likely continue to fester given current economic and political realities. Unless the U.S. economy normalizes and jobs commensurate with people’s education become available, student loan delinquency will be part of American life for the foreseeable future. But if the recent precedents set by the courts are any indication, bankruptcy may soon become a viable option for cancelling student loan debt, and this may in turn also compel Congress to finally take action.
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