For student loan borrowers, using bankruptcy as a route to get rid of it is once again in the news.
On Feb. 20, the Department of Education announced its intent to revisit guidelines on student loans in bankruptcy proceedings. The agency requested public comments in a Federal Register notice to evaluate the process for “undue hardship” claims. For borrowers, undue hardship is the standard to overcome the release of their student loans via bankruptcy.
This isn’t anything new because borrowers trying to go this route have historically battled with the federal government. A 2005 federal law prohibits most student loan borrowers from using the bankruptcy option unless they can show they are suffering under certain “undue hardship” criteria while paying their student loans. Courts have defined this term and created their own sets of standards. Meanwhile, the Department of Education and the companies that hold student loan debt have blocked undue hardship claims through litigation.
With student loan debt reaching record levels at about $1.4 trillion, this latest evaluation could expand the definition and possibly help some students. But would this make a big difference?
Although it’s not clear yet whether any decisions could benefit borrowers, the potential changes will need to be balanced, said Clare McCann, deputy director of higher education policy at New America.
“You want to make sure it captures people who aren’t able to pay and won’t be able to pay over the long run, so you’re not wasting energy collecting debts you’ll never be able to collect on,” McCann said.
Should bankruptcy become an option, it’s not without some negatives. At the top of the list is the impact on credit scores.
Bankruptcy’s Impact on Credit
Whether a Chapter 7 or Chapter 13 bankruptcy is filed, a consumer’s credit score will take a hit. Bankruptcy filings stay on credit reports for 10 years and if debt becomes a problem again, there is an eight-year waiting period before a second filing.
For the most part, student debt won’t be forgiven and currently only a small percentage of student loan borrowers do file for bankruptcy, noted John Rao, an attorney with the National Consumer Law Center who specializes in bankruptcy.
For those who file, Rao told Higher Ed, “These are individuals who have some kind of hardship that is lasting, or they’re in a position where maybe they went to college and never got a degree. In the case of some borrowers, they’re just not going to be able to repay the loan.”
Options for Repaying Student Loans
Borrowers having problems repaying student loans can review their options through the Department of Education to see if a better repayment plan is available, including a 25-year plan to repay loans. In addition, under income-driven plans, borrowers can also apply for federal loan forgiveness. There are numerous options and to go this route, borrowers will need to fall under certain criteria.
For borrowers repaying private student loans, they can call their lenders and discuss other payment options. That includes loan modification programs and repayment plans.
And for those trying to pay down their loans faster, options also exist such as refinancing for a lower rate. But first it’s important to honestly assess one’s current financial situation to make the best choice for their needs.
Author: Mike Brown
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