Recent estimates suggest that about two-thirds of all college students take out loans to pay for college. In fact, student loans now total about $870 billion, according to a new report from the Federal Reserve Bank of New York. That figure exceeds the nation's total credit card balance ($693 billion) and auto loan debt ($730 billion) by billions.
There's one big difference between those different types of loans, though. If you fall into tough times, you can discharge credit card and auto loan debt through bankruptcy. But student loans are nondischargeable in bankruptcy and will exist, even after bankruptcy.
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It hasn't always been so. A few decades ago, some less scrupulous students took out student loans to finance professional degrees. Once they achieved those degrees, they eliminated the debt by filing bankruptcy. It was a great way to start a lucrative career debt-free. That's when Congress intervened. They didn't want to see student loans abused that way and changed the law.
That means bankruptcy is no longer an option for erasing student debt, except in extreme cases of undue hardship. It's a strict standard and one that is difficult to meet. Saying you can't find a job or were tricked into taking loans won't cut it.
In those rare instances where student debts have been discharged through bankruptcy, the debtors experienced extreme circumstances to meet the standard of "undue hardship." In one case, for example, the debtor was in a vegetative state following an auto accident. In another, the debtor had Asperger's Syndrome so severe, it prevented her physically and mentally from ever working again.
If you find yourself able to work but still unable to make student loan payments, you may qualify for a special payment plan.
The first is called public service loan forgiveness, and it's offered through the U.S. Department of Education. It's an income-based repayment program that forgives your debt after you make 120 consecutive, on-time payments. To qualify, you must be employed full-time in a public service position, such as a government job or nonprofit organization.
The second is income-based repayment and is available for most major types of federal student loans. This option caps required monthly payments at an amount intended to be affordable based on your income and the size of your family. After 25 years of payments, the remaining debt is forgiven.
If you have a mix of different types of student loans and you don't qualify for either of those options, one additional possibility is to consolidate all your education debt into one lower-interest-rate loan.
Legal decisions surrounding student loans and bankruptcy are complex and outcomes can be unpredictable. If you find yourself sinking deeper into financial problems each month, your best bet is to consult a bankruptcy lawyer. Even though student loans are nondischargeable, bankruptcy may help you discharge other debts and gain the ability to pay your student loans. Many bankruptcy attorneys offer free initial consultations. By helping you examine the options, they can help you identify the course that makes the most sense for your future.
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