Many students in South Carolina and elsewhere in the United States are graduating with historic levels of student debt while also facing challenging job prospects. The dual issues of a high debt burden and low job prospects can set young individuals on a path to financial insecurity. Under today's personal bankruptcy laws, student debt is generally not dischargeable, but that may eventually change for one type of student loan.
Recently, the U.S. Department of Education and the Consumer Finance Protection Bureau urged Congress to review the bankruptcy exemption for private student loans. According to The Wall Street Journal, Richard Cordray, the CFPB chief, said it would be sensible for Congress to consider modifying the bankruptcy code, "in light of the impact on young borrowers in challenging labor-market conditions." In addition, Cordray said the law that prohibits the discharge of private student loans has not achieved the law's objectives in bringing down the costs of borrowing and providing greater access.
Experts in favor of reform believe the threat of discharging private student loans in bankruptcy will force lenders to provide borrowers with more options for financial relief in the event of economic hardship. The change may also incentivize lenders to adopt underwriting criteria that will prevent students from taking on massive educational debt. The chief operating officer of Sallie Mae also supports allowing private student loans and even public student loans to be eligible for discharge during bankruptcy. Sallie Mae, in particular, is in favor of a policy that would allow borrowers who make a good faith effort to repay their student loans over a five- to seven-year time period and still face economic difficulty to be eligible for discharge of their student loans in bankruptcy. However, many banks and private lenders are opposed to the proposed reform.
Those who oppose reform say debt forgiveness for private student loans through bankruptcy will increase the costs of student loans for all borrowers because it may raise the interest rates of student loans. Private lenders and others who are opposed argue that the root of the problem is the increasing cost of tuition.
For students with a high student loan debt burden the issue is of real concern, but under current bankruptcy rules the discharge of any student debt is extremely difficult. To discharge student loans, a debtor must show that:
- He or she cannot maintain a minimal standard of living based on current income and expenses
- Additional circumstances exist that demonstrate the current situation will not change for a significant portion of the repayment period of the student loans, and
- He or she has made a good faith effort to repay the loans
While it may be difficult to discharge student loan debt in bankruptcy, bankruptcy protection may be appropriate for the discharge of other debt. A burdensome student loan debt payment can impede the ability to pay other obligations and debts such as car loans and credit card bills.
If you face an unbearably large debt burden, contact an experienced bankruptcy attorney to discuss your legal options for financial relief.