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When student loan payments are becoming onerousThe idea of fully repaying a loan through bankruptcy may start to sound like the next best option. As a result of bankruptcy, you will completely lose responsibility for this large chunk of debt.
But filing for bankruptcy in any scenario is a serious financial decision and usually a last resort. Bankruptcy stays on your credit report for seven to ten years, which makes it destructive for you. It is also extremely difficult to do when it comes to canceling student loans.
“We’ve had clients who tried to get a federal student loan dismissal from bankruptcy, but in the vast majority of cases they didn’t succeed,” says Travis Hornsby, Founder Student Loan Planner… “If your income is above the poverty line and you don’t have a permanent disability, your chances are slim.”
To file for bankruptcy on student loans, borrowers must pass a multi-part test to prove that they have no chance of ever paying off the debt. They must demonstrate that paying off student loans will cause them “unnecessary hardship”.
“Congress did not define what was meant by ‘undue hardship’, so the decision was left to the discretion of the courts,” says a higher education expert. Mark Kantrowitz… Thus, the courts use a general method called the Brunner test to assess whether a borrower is eligible for a student loan due to bankruptcy. Using the Brunner test, the borrower must prove the following:
- Failure to pay off debt while maintaining a minimum standard of living;
- It is highly probable that these circumstances will persist for most of the normal maturity of the loan; and
- A good faith effort to repay loans using financial assistance options such as deferrals, deferrals, and income-adjusted repayments
How to Demonstrate “Inappropriate Adversity”
“Student loan bankruptcies are very rare, but not completely impossible,” adds Kantrowitz.
According to Kantrowitz, here are some of the circumstances in which borrowers were able to demonstrate “undue difficulty”:
- The borrower is disabled, but the private student loan does not provide disability exemption.
- The borrower has a dependent with a disability, which affects the borrower’s ability to work full time while caring for the dependent, or when the cost of caring for the dependent results in a higher minimum standard of living.
- The borrower has very low income and limited prospects for increasing income.
- The obligation to pay child support and alimony reduces the borrower’s net income, affecting the ability to maintain a minimum standard of living while paying off student loan debt.
- The borrower’s cost of living is high due to where they live (eg New York, Los Angeles, San Francisco, Boston), which affects the minimum living standard threshold.
- Higher education was useless and did not allow the borrower to earn enough to pay off the debt.
- The amount of debt is excessive compared to the income of the borrower, making it difficult to pay off the debt. For example, grandparents signed a private student loan for their grandson and are now retired with a fixed income.
Getting their student loans canceled in the event of bankruptcy is not easy, and fortunately, desperate borrowers can take other steps before making a final attempt.
“In the process, when our clients tried [filing for bankruptcy]if they cannot prove that they have no hope of repaying the debt, then the Ministry of Education is usually responsible by telling the borrower to sign up for a loan. income-based repayment plan“, explains Hornsby.
In federal income-driven repayment plans, your monthly bill is recalculated to reflect any changes in your income. Thus, your monthly student loan payment reflects how much you can afford to pay.
Hornsby offers income-driven repayment plans such as Pay as you earn (PAYE) and Revised payment as received (repayment)… With these programs, your credit score will not be damaged, as in the case of bankruptcy, and you only need to pay 10% of your discretionary income. At the end of the repayment period, the remaining balance is forgiven.
Is your monthly student loan payment too high?
If your monthly payment is too high, consider refinancing student loans… By refinancing, you can both lower the interest rate and extend the term of the loan, so that your monthly payments will be lower. While this means that you are going to collect interest for months or years, it may help you in the near future if you are short on money.
SoFi Student Loan Refinancing offers both variable and fixed interest rates, low interest rates, various loan conditions, no application or processing fees, refinancing protection, and the possibility of co-signing. Read Select’s full review on student loan refinancing.
With federal student loan payments and interest freezes currently in effect until September 30, 2021, we recommend refinancing only private student loan borrowers. Be aware that refinancing your federal student loans, even after the freeze ends, means you lose state protection for example, income-oriented repayment plans and any type of loan forgiveness.
No refinancing fees
Federal, Private Loans, Graduate and Bachelor Loans, Parent PLUS Loans, Medical and Dental Residence Loans
Variable rates (APR)
From 2.24%; from 2.37% for doctors / dentists (the price includes a discount on auto payment 0.25%)
Fixed rates (APR)
From 2.99%; from 3.12% for doctors / dentists (the price includes a discount on auto payment 0.25%)
From USD 5,000; over $ 10,000 on medical / dental residency loans
Minimum credit rating
Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article are solely owned by the Select editors and have not been reviewed, endorsed or otherwise endorsed by any third party.