Earning a college degree is one of all the noblest reasons to take on debt, but rising tuition costs have created a student loan debt crisis in this country. More than 44 million borrowers collectively owe $1.5 trillion in student loans. This makes it the second-highest consumer debt category, ahead of credit cards but behind mortgages.
If you struggle to pay your student loans each month, you might wonder if declaring bankruptcy is an option to discharge your debt (have the loan forgiven). The short answer to this question is no, student loans traditionally can’t be discharged in bankruptcy.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 exempts private and federal student loans from discharge. This deters borrowers from taking on debt, earning a degree, and then filing for bankruptcy to avoid paying back the loan. However, there are exceptions if you can demonstrate “undue hardship.”
What Constitutes Undue Hardship?
The Brunner test is the most common standard used to determine undue hardship. In general, a borrower must face the following to be eligible for student loan discharge in bankruptcy:
- Extenuating circumstances have created a hardship that prevents the borrower from repaying the loan while maintaining a minimum standard of living.
- The borrower’s situation is likely to continue for the duration of the repayment term.
- The borrower has made attempts to repay the loan, such as by trying to work out a payment plan.
This is the basic framework most federal districts follow. Courts may also consider the borrower’s age, income, health, and other factors that could impact their ability to repay student loans.
Is Filing for Bankruptcy the Best Option?
Every person’s situation is different, so you’ll need to base your decision on your specific life circumstances. Just remember that filing for bankruptcy isn’t an “easy way out.” The process takes time, energy, and money, and bankruptcy remains on your credit report for years. In general, you should only consider bankruptcy for student loan discharge if you have exhausted all your other options.
Tips to Repay Student Loans
If you’re struggling to pay off your debt, try these tips before you assume bankruptcy is your only choice:
- Pay off credit card debt first to get high-interest payments out of the way.
- Set up income-driven repayment based on your earnings, family size, and other factors. Your monthly payments could be as low as $0, and after a set period of up to 25 years, federal student loans can be forgiven. You will be required to pay income taxes on the forgiven loan amount.
- Request a graduated payment plan that starts with low monthly payments at first and gradually increases them over time.
- Extend your repayment period by up to 25 years to decrease the amount you owe each month.