We read about the student loan problem frequently, and if you're a person who has large student loans and is having difficulty paying them back, you're experiencing the "student loan problem" very personally. huffingtonpost.com recently said "Student loans have become the sudden modern toxic loanwe should expect to see this rate of student loan saturation increase, burying more in debt and a working life of feeding the student loan payments."

What's going on here? What is causing this problem and why aren't student loans dischargeable (able to be removed) in bankruptcy like other loans?

It starts with the noble premise that Congress wanted to encourage people to obtain a college education, and to accomplish that created the federal guaranteed student loan program. This program offers student loans to people with little regard for creditworthiness. After all, how many students would be able to qualify for "normal" loans?

To help ensure that those loans would be available, Congress did not want to discourage lending for fear of bankruptcy losses. It therefore made student loans very difficult to discharge in bankruptcy. In one case, the U.S. Court of Appeals said "In return for giving aid to individuals who represent poor credit risks, it strips these individuals of the refuge of bankruptcy in all but extreme circumstances," representing "a conscious Congressional choice to override the normal 'fresh start' goal of bankruptcy."

So there we have it, a noble goal along with seemingly reasonable means to accomplish that goal. How is it working out?

For one, the goal of providing a means for people to get a college education is working out, and that's very good. But another result is that large numbers of people are buried in student loan debt with no hope of paying it off and no way to get rid of it.

In extreme cases, people have been allowed to discharge their student loan debt in bankruptcy, but the vast majority cannot, including a physician who opted to remain a missionary, a registered nurse who went to chiropractic school at age 45 but found that her new profession didn't provide sufficient income to pay off her debts, and a school bus driver whose hopes that an education would provide her with a position in the travel industry were not fulfilled.

There are moves under discussion to provide relief for student loan debt in situations not as extreme as now required. However, until that happens we're left with a real problem, an increasing number of people who are behind in their student loan payments, have no means to pay if off in a reasonable amount of time, and have no money to "spend normally" which would help the economy prosper.

If you have student loans and want to learn about how to manage them, here are some resources:

direct.ed.gov/RepayCalc/dlindex2.html
finaid.org/loans/ibr.phtml
studentloanborrowerassistance.org

For a free consultation, click here or call 415-342-4666

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2 thoughts on “Why can't I get rid of my student loan debt in bankruptcy?

  • March 15, 2013 at 10:22 am
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    You have outlined the problem nicely. That said, I am 51 years old and went back to school later in life after the field I was trained in changed due to computers. My wife had to do the same but fell sick a couple of years ago and hasn't been able to work. We also took out additional loans (parent plus loans) to help our son remain in school and complete his degree which he completed nearly two years ago.

    After graduating, our son moved back in with us since the economy made obtaining a job nearly impossible. To date, he has still been unable to find a full-time opportunity and his two part-time jobs are low-paying positions making it impossible to make his student loan payments and live on his own so he lives with us and helps as best is able.

    My wife and I are straddled with over $800.00 a month in student loan payments (approx $90,000.00 in student loan debt) and have only the one income between us. My job requires maintaining a national security clearance that could be lost with bad credit so, not making the loan payments is not an option we could consider even if we wanted. There is no longer relief available through bankruptcy protection and the lenders are unwilling to discuss lower payments so, how do we get relief? Where's our bailout? Having that $800.00 per month would go back into the economy as there is much we are doing without to make those payments. Thank you.

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  • March 15, 2013 at 10:31 am
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    Andrew, you certainly are a poster child for the student loan problem. I wish I had a solution for you other than to tell you to be sure you're up to date on all the different student loan payment programs available, using the links at the end of the article above as a resource. But I'll bet you're already up to date on those. However, if you think you need help navigating the different possible programs, let me know and I can give you a referral.

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