Debt Relief for Student Loan Borrowers

Girl worried about paying student loans

What are Debt Relief options for student loans? Here is the run-down for people who live in the San Francisco Bay Area:

1. Income-Based Repayment (IBR)

Fortunately, there is a federal program called Income-Based Repayment. This is one form of debt relief available for many borrowers who have federally-guaranteed student loans.

However, you can’t do IBR with a private student loan.  To find out whether your loan is private or federally-guaranteed, see this post.

If you can qualify for IBR, you may be able to cap your monthly payment on the loan to 15% of your discretionary income, and after 25 years of payments, the remainder would be forgiven. If your income is low enough, it is possible to get an IBR payment of $0 per month.  Why not start the 25-year clock running now? Click here for an IBR calculator to see what your monthly payment could be.

The new PAYE (“Pay As You Earn”) program is also good but it is only for people with student loans issued in 2012 or later.

If you haven’t paid on a federally-guaranteed loan for awhile (and if you are getting calls from debt collectors), your loan could be in default.  You’ll need to get out of default before you can get into IBR.

2. Bankruptcy

Originally, student loans were dischargeable in bankruptcy just like any other debt. However, in the late 1970s, a claim was made by financial industry lobbyists (a.k.a. banksters) that people would incur student loan debt and then immediately file bankruptcy.  In reality, this never happened, and there was no evidence that it was going to happen. At best, there was evidence that it happened less than 1% of the time. Still, Congress created an exception for federally-funded or guaranteed student loans anyway.

Back in 1978 the federal student loan debt exception was only temporary, only five years after the loan repayment started. In 1990, the waiting period was increased to seven years. Later, in 1998, Congress made it permanent. (Except for Undue Hardship: see below.)

It got worse in 2005 when private student loans were added and are now being given the same status historically reserved for federally-guaranteed loans.

The result is that student loans are normally not dischargeable in bankruptcy. (Except for Undue Hardship: see below.)  This is true, in California, even if you are just a co-signor on the student loan and you never even received the benefits of the education!

3. The Undue Hardship Test for California and others in the 9th Circuit

There is an exception if a borrower can show “undue hardship.” The rule in California is from a Ninth Circuit Court of Appeal case entitled In re Pena, 155 F.3d 1108 (9th Cir. 1998).  The borrower must show that (1) she cannot maintain a minimal standard of living for herself and her dependents if she is forced to repay the loan, (2) that this situation is likely to persist for a significant portion of the repayment period, and (3) that she has made a good faith effort to repay the loan.

As applied in the Northern District of California, the Undue Hardship test is not very easy to meet.  I was able to prove undue hardship for one of my bankruptcy clients who had co-signed his granddaughter’s student loans.  However, he was over 75 years old, living on his retirement income and social security benefits, and was barely able to make his monthly mortgage payments on on underwater house. An “undue hardship” situation may not need to be exactly like this, but it would have to be similar in showing that there was almost no chance that the loan could be repaid without literally putting the borrower on the street.  Age and ability to obtain gainful employment are important factors.

Which brings us back to IBR.  In the Northern District of California, the bankruptcy courts have recently been ruling that borrowers who fail to enroll in IBR fail to establish the minimal standard of living test, and the good faith effort to repay test.

The lesson?   Try to enroll in the IBR (or ICR) Plan first.  If your student loans qualify for the IBR Plan, only file bankruptcy if you have significant credit card and other debts that are dischargeable in bankruptcy.

If  you have private loans which are not eligible for IBR, consider whether you can meet the three-part test for undue hardship just for the private loans.  You might need bankruptcy relief for your other non-student loan debt, and the undue hardship test might be worth a shot for a partial discharge of private student loans.


3 Responses to Debt Relief for Student Loan Borrowers
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  2. Joshua Cohen
    October 29, 2011 | 6:19 am

    All excellent comments and observations. ICR is only useful for Parent PLUS holders, since they cannot have IBR. As for the default borrowers, getting out of default is easier than most people realize. It just takes a good attorney to find a way to “work” with the collectors. Get out of default, in to IBR, and start surviving until the real change comes.
    Michael, thanks for fighting the fight – there are not nearly enough attorneys working with student loan borrowers.

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