Student Loans and Bankruptcy

Over the past decade with the sky-rocketing costs of college, college students have racked up thousands of dollars in student loans. Many students have borrowed money to finance their college education, with the hope of improving their lives. Unfortunately many students find they owe so much money they cannot even make their initial debt payment.

One recent blog posts highlighted a Seattle couple who had borrowed close to $500,000 in student loans. This couple graduated but only made a combined income of $80,000. According to the blog article, “They took out as much as they were able to and didn’t even know how much they had. It’s the most egregious case I’ve ever seen.”

Although borrowing at this level is unusual, student loans have proliferated, mostly due to the increased cost of attending college. It is estimated that college costs now exceed inflation by as much as 6 percentage points a year. In fact, the average cost of attending a private school in the United States is a whopping $37,000 per year, making it out of reach for most middle class students.

Given the rise of educational costs, Congress has come to the rescue by raising the maximum of federal student loans. Grad Plus loan now allow graduate students to borrow the amount needed for the cost of attendance.

Not surprisingly, by 2009, students had racked up an estimated $24,000 in average debt by the time they reached graduation. If this increases at a estimated rate of 6% a year in another five years the average will hover around $30,000.

So what happens after you graduate? Unfortunately, you may find your mailboxes flooded with loan bills almost immediately upon graduation. Defaulting on a student loan can be devastating to your financial future. If you cannot pay, the government may come to collect. Debt collection efforts can include garnishing your wages, assigning your case to a collection agent, or withholding federal or state refunds.

Unpaid student loans can also cost thousands of dollars in interest and collection costs, most federal loans will be considered delinquent after 21 to 30 days. Consider how the fees and interest can add up. A student loan for $2,000, which defaulted 20 years ago, may now cost an estimated $30,000!

If you have a private loan the debt collector may not be able to garnish your wages or pursue the student loan indefinitely, but they can sue to collect the debt. Private loan companies are more likely to take borrowers to court, but they must do so within the state’s statute of limitations.

Succeeding in court will allow a private loan company to garnish your wages, levy your bank accounts or put a lien on your home. If you have a private student loan you cannot pay, talk to your lender. Some lenders may be willing to restructure debt payments if collection for the full loan amount seems doubtful

Does Bankruptcy Discharge a Student Loan?

Filing for bankruptcy protection will not allow you to discharge your student loans unless you can prove that repayment will create undue hardship for you or your family. Undue hardship is generally defined as the inability to provide an “adequate standard of living”, and this inability will continue over time. You must also prove that you made a good-faith effort to repay your student loan.

Under some conditions the bankruptcy court may require you to pay a portion of the loan without hardship and discharge the remaining part of the student loan.

If you have student loans and are considering filing for bankruptcy protection, contact a bankruptcy lawyer. Bankruptcy attorneys can review bankruptcy laws and evaluate your bankruptcy case.

Even if you are unable to discharge your student loan, discharging other unsecured debt may free up enough discretionary income to repay your non-dischargeable debts.

Options for your Student Loan

Generally, if you do not make a payment on your student loan it is considered “in default” within 270 days. If your loan is about to default, contact your lender and discuss you options. Allowing your student loan to default may eliminate your legal right to rehabilitate your loan or to receive future financial aid.

If you are unable to negotiate a new payment plan with your lender, you may have the option to consolidate your student loans with certain debt consolidation programs. Keep in mind debt consolidation efforts may affect your credit record.

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Beth L. is a content writer for Better Bankruptcy. Good content and information is one of many methods we utilize to bring you the answers you need.