Student loan debt at record levels- what options are there?

In late May 2012, the Federal Reserve Bank of New York reported  that debt from educational loans in the U.S. rose 3.4 percent to $904 billion in the first quarter,  increasing  from $874 billion three months earlier.  This, while all other forms of household debt fell a combined $383 billion, according to the report. Ninety-day delinquency rates for student loans is now higher than that of mortgages, auto loans and home equity lines of credit.

This is a massive problem that voters and lawmakers are going to have to deal with. At the personal level, most but not all of these debts cannot be discharged or eliminated in bankruptcy, under the present law.  Not all loans used for education are exempt from discharge. Only the following types of loans are protected:

1. Loans made, insured or guaranteeds by a federal, state or other government

2. Loans made under a program that received  funding from government or a nonprofit institution.

3. Educational loans qualified under certain sections of the Internal Revenue Code.

The first step is to locate or ask for all the information on  any programs under which the loan was made. This can usually be obtained from the original financial aid office.

In a very few cases of extreme hardship, the law does allow even these types of loans to be discharged. This is a difficult test to meet.

Even without an ability to discharge these loans, for people drowning in other debt using a bankruptcy to remove that debt load can make the job of repaying student loans easier. We also encourage clients to reach out to the student loan lenders for relief in repayment terms.

In those cases where there is a co-signer on the loan, a Chapter 13 bankruptcy provides a means to focus payments made under a bankruptcy plan towards repayment of the student loans.

For anyone facing these types of debts careful planning and consideration of all the choices is critical. Bankruptcy is one tool, but it is not right for everyone. Ignoring the problem is worse. Consultation with experienced legal counsel is very important. Long term planning for all involved is key to long term financial stability.

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