The Student Loan Conundrum

This is one area of law where I have both a personal and professional interest.  Between my Jurisdoctorate and my wife’s Masters degree, we have significant student loans, even after half a decade of payments.  How significant?  Suffice it to say, bigger than yours.

This is also an issue for many of my clients.  They can wipe out their credit card debt, their judgments, and sometimes even their tax liability.  Student loans, however, are usually forever.  Even bankruptcy won’t do much for student loans unless you can pass the ill-conceived, sadistic standard known as the Brunner test (named after a case, of course):

1. You cannot maintain even a minimal standard of living while paying your student loan debt.

2. Additional circumstances suggest that this problem will persist for the majority of the payback period.

3. You have made a good faith effort to work with your student loan lender.

Courts have interpreted this test narrowly enough to mean that, while it is not technically impossible to pass, it usually is.  It is extremely rare for student loans to be discharged in bankruptcy.

Why?  For federally-backed student loans, the answer is obvious: the government will be left holding the bag if you discharge the debt.  As you might know if you pay even passing attention to the political news du jour, our government doesn’t have a ton of disposable income right now, so they don’t want to pick up the tab for billions of dollars in discharged student loans.

For private loans, the answer is more nuanced.  The lenders made the loans on favorable terms because they knew the risk was very small, since bankruptcy would not wipe away the debt.  That might change in the future, but is unlikely to change retroactively.

So, what do you do if you have significant student loan debt?  The best solution for most people is income-based repayment.  If you qualify for this option, depending on your type of loans, you are permitted to pay what the government has determined you can afford.  Here’s how you figure it out:

1. Take your gross income, usually from your last tax return.

2. Subtract 1.5 times the poverty level, based on your household size.

3. Take fifteen percent of the result, and divide by twelve (months in a year).  That is your monthly payment.

4. Re-apply each year, and after 25 years if you still owe, the remaining debt will be forgiven.

One small wrinkle: if you took out any loans after 2009, you take 10% rather than 15% in step 3, and the time period for forgiveness is shortened to 20 years instead of 25.  One additional issue that won’t come up for another two decades or so is whether the forgiven debt will be treated as taxable income; as it stands today, it will, and that can cause tax problems.

This is, in my opinion, the simplest way to deal with long-term student loan debt that you simply can’t pay.  It is far from the only option.  There is an attorney named Joshua Cohen who specializes in student loan issues, and you can check out his site for more information.

~Andrew

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