It is commonly thought that student loans can never be discharged, leaving some former students with heavy burdens and no relief. There have always been limited avenues that can result in the discharge of a student loan; however, obtaining one has always been a long shot. In July 2015, the Department of Education gave further clarification which should provide more clarity when determining if a student loan qualifies for partial of full discharge through bankruptcy or other situations.
Qualifying Reasons for a Discharge
Death of the student for loans in the student’s name.
Permanent and Total Disability qualify for federal student loan discharge and some private loans. The disability can be qualified by the military VA’s office, social security disability office or a private physician under guidelines set forth by the Department of Education.
Undue Hardship has been hard to prove and each court has had their own definition as to what qualifies as a hardship. This is where the changes are being made. To date there has not been consistency on the definition of a hardship and when a borrower qualifies as a result of a hardship. The Department of Education issued a letter laying out clearer instructions on what factors will be used to determine who qualifies for relief.
Other Repayment Options
In recent years the repayment terms have been expanded enabling more individuals to make on time payments within their current income. Income based options also provide for forgiveness after the equivalent of up to 25 years of payments if the loans have a remaining balance at the end of the repayment period.
Definition of Undue Hardship
A few of the key changes from the Department of Education include:
Bankruptcy factors that are beyond the borrower’s control. This could include a divorce that results in a permanent reduction of income, disability of a spouse or child that impacts income or other unforeseeable long term event. The key is that the circumstances were not in place when the loans were distributed and the circumstances are likely to be in place for the foreseeable future. This would eliminate bankruptcy reasons like overspending, poor financial decisions, or other factors a judge might feel was within your control.
Debtor is approaching retirement. This factor will also consider when the loans were taken out and how payments have been made. Just reaching retirement age is not grounds for a discharge. However, if retirement is looming and you are downsized and forced into retirement, there may be relief through this provision.
Health of the debtor has changed. Now you can also gain a discharge if you have a long term health crisis that reduces your ability to work without having to qualify for total and permanent disability.
Other factors that will be considered in each of the above cases include:
Did you make an effort to repay the loan if resources were available?
What is the total loan balance compared to the cost and likelihood of gaining repayment (from the banks or attorneys perspective).
The amount of time that has lapsed since the loans were dispersed.
Debtor’s expenses. Are they reasonable and if so is there an ability to repay part of the loans through one of the income driven options.
For those seeking a discharge of student loan debt the documentation must be meticulous as the decision is still up to the judge. The new statement issued by the Department of Education should open the way to better consistency across courts and more relief for those seeking a discharge of student loan debt through a Bankruptcy or other extenuating circumstances.