Federal Reserve recently released “G.19 Consumer Credit Report”. According to the facts presented in the report, America’s total student loan debt has crossed limit of $1.5 billion and students are facing great difficulty to pay off. At of the end of 2018, around 11 percent of student loans were either 90 days overdue or in default.
Government has offered several options to facilitate federal student loan borrowers, deal with their debt. These include home based repayment plans. These will scale payments to discretionary income. Consolidation loans can be extended to few terms; thus lower monthly payments. Students taking advantage of Public service loan forgiveness program, deferment or borrowers with private loans have fewer options outside of refinancing.
However, one last-resort for debt discharge is bankruptcy, rarely applies to student loan debt, thanks to lack of clarity in the congressional mandate. If you are filing for bankruptcy, you need to make a case that paying the debt would impose an undue “hardship” on you and your dependents, if any. Applying for bankruptcy, will cause a hardship almost by definition.
Unfortunately, currently we don’t have any “legal” definition of an “undue hardship” for student loan repayment. Since congress didn’t find time to define the term, courts usually use one of two tests to interpret the rule. (1) The burner test and (2) the totality of the circumstances test. Both test contain further vague terms, like “minimal standard of living” and “reasonably necessary living expenses”, which can complex the matter sometime.
According to current legal situation, borrower has to file a petition known as an adversary proceeding, to determine the sensitivity of the “undue hardship”. Many, who tried to file for bankruptcy have failed due to variations of living standards in different states and vague legal terms in contract and law. Making such case isn’t easy, so many often choose not to pursue the argument and lose without even trying.
The trump administration however, ask public to comment on what constitutes an “undue hardship” with respect to student loan discharge- under the laws of bankruptcy. The request was initiated last year. This won’t guarantee that U.S Department of Education will be able to clarify the definition properly or the legal definition will favor the loan borrowers, but initiative seem promising so far. Hope fully, Govt. consider students first and soften some conditions for bankruptcy law under student loan debt.
Trump administration wants input from people on how to make it easier for students so they won’t be discouraged to apply for bankruptcy just because of poor ratio of success in past or vague terms make it difficult for them to make a case. They want students with student loan debt to make an informed decision.
The intention is not to help – everyone but those who are in need and have no other viable options. Hopefully, you never have to consider that option.