Student loan debt has become a financial crisis for millions of former college students. Debts balances have ballooned, and -quality jobs are not abundant enough for graduates to tackle student debt payments and other costs, like home ownership or starting a family. These debts are having a ripple effect throughout the economy.

The debt statistics are staggering: Currently, nearly 1.3 trillion dollars in outstanding student loan debt are spread among 43 million borrowers. The average debt held for 2016 graduates is $37,172, which amounts to an average monthly payment of $351. A staggering 71% of graduates carry student loan debt after completing school¹. As graduates struggle with payments, many return home to live or rely on parents for continued support, financially impacting both new graduates and those nearing retirement.

In addition to this, student loans have a delinquency rate of 11.6%, representing 50.8 billion dollars in default. Approximately 10 percent of borrowers are utilizing the income-based repayment options offered to nearly all borrowers, which could potentially reduce default rates. Credit card delinquencies pale in comparison to student loan defaults, coming in at only 3% of borrowers 90 days or more in arrears².

Student loan borrowers who are delinquent often have no exit. Repayment negotiation and bankruptcy discharge are typically not available options. The federal government guarantees much of the student loan debt, putting taxpayers on the hook when payments lapse. These differences impact your ability to catch up, pay off, and otherwise deal with student loan payments in a responsible way.

Lack of ability to discharge debt leaves millions with heavy student loan debt loads and no relief in sight. In July 2015, clarification on discharge qualifications was offered by the Department of Education. The new policies are expected to provide greater consistency with judgments and court decisions.

The guidelines presented are specifically for federally backed student loans, not private loans or those not guaranteed by the government. Private student loans follow the terms of the agreement at the time of disbursement.

Can You Qualify for A Discharge of Federal Student Loans?

Death will typically result in a discharge of the debt for all loans in the student’s name. Parent loans taken out on behalf of the student may qualify for discharge through an appeals process, but is not automatic.

A Disability that is permanent and total will often qualify for debt discharge. To qualify the student must be classified as permanently disabled by the military VA’s office or the department of social security disability office. A private physician may also certify the disability of the former student if the guidelines from the Department of Education are followed. Some private loans will also waive outstanding balances under these circumstances.

Hardship is a newly added exception that may result in a discharge through the bankruptcy courts, but the standards are not consistent across judges, making the new guidelines set in July 2015 valuable to improve consistency with decisions.

Defining Undue Hardship

In 2015 the Department of Education sought to clarify what constitutes an undue hardship and bring greater consistency in court decisions. Changes to the definition include the following:

What is beyond the borrower’s control. When filing for bankruptcy, the courts review the factors of the case and distinguish which elements were outside of the borrower's control. Events such as divorce or a new disability can result in a permanent reduction of income for the borrower. The courts must evaluate life events that have long-term consequences and appear to be permanent. The circumstances must have changed after fund disbursement, been unpredictable, and likely to be in place for the foreseeable future.

Changes in your circumstances which a judge feels are under your control will disqualify you for discharge. Events like overspending, bad financial choices, or not finishing your degree, are considered to be under your control, even though they may impact your ability to repay.

Retirement and the approach of retirement are also a consideration when reviewing a student loan discharge request. A judge will consider how long ago the loan disbursement occurred and the current repayment history. Reaching age 65 does not automatically qualify you for a release of liability. Judges will, however, consider circumstances where retirement was not voluntary such as a company downsizing, layoff, or other events out of your control that lead to retirement and lower income, which is likely to be permanent. When these circumstances are in place, a judge can offer relief in the form of a loan discharge.

Your health may also be a factor when deciding the fate of your student loan obligations. Perhaps you do not qualify for a permanent disability, but your health has declined to the level where you must retire, or reduce working hours. A decline in health, resulting in a reduction of income that is likely to be permanent, may qualify you for relief.

Other Considerations That Factor In To a Discharge Decision

Repayment history. Were you making payments before the events occurred that have permanently reduced or eliminated your ability to pay off the debt?

Total debt that is in place compared to your income. The judge considers how likely you are to regain adequate employment and to be able to repay the loan from the lender's perspective.

How much time has passed since the loan disbursement? Recent loans are less likely to be discharged than older loans.

Your total expenses Total income compared to household expenses will show whether some of the loan balance could be satisfied through income-based repayment options.

Possibility of Utilizing Repayment Options

In an effort to lower default rates, new plans have been made available to nearly all borrowers: Now, instead of the standard 10-year flat rate repayment plan, you can choose from income-based programs that change each year. Tax returns must be submitted, and you must requalify each year. Payments, however, can be extended up to 25 years with loan forgiveness of any remaining balance after the maximum repayment period passes.

The new standard, set by the Department of Education,makes it easier to qualify for a bankruptcy discharge of student loans. If you fail to qualify under these new terms, moving to a new repayment option may allow you to catch up defaulted loans with a payment that will fit your budget.

¹https://studentloanhero.com/student-loan-debt-statistics-2016/

²http://www.creditcards.com/credit-card-news/credit-card-delinquency-statistics-1276.php

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