Many students need some sort of loan to pay for their higher education and the debts that are taken for the express need of funding one’s college tuition are known as student loans. They can be federal, that is loans taken from government funded agencies, or private, loans taken from private banks, in nature.
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However, student loans have a unique characteristic that is they are non-dischargeable loans. Other non-dischargeable loans include child support, alimony, taxes and other such debts that don’t get eliminated even after you file for bankruptcy. So, when you opt for a student loan, you have the obligation to pay it back.
Earlier, because of the loopholes in the bankruptcy law, many students after completing their studies would file for a bankruptcy and student loans were discharged. This led to stricter laws in bankruptcy and student loans were clubbed with non-dischargeable debts. The students could get all the other loans cleared from their credit records but not their student loans in bankruptcy discharge. You can only discharge a student loan if you prove that repaying the loan is causing extreme hardship to you and your family. Also, if the debtor is disabled, paralytic, or has a terminal disease and can’t work then the court judge can consider including the student loan as dischargeable debt.
A recent change in the laws regarding bankruptcy and student loans makes private student loans to be discharged. In the amendment, private student loans have been declared equivalent to private consumer loans which makes it easy to discharge as other debts. However, this change has not been made to the federal student loans which are still classified as non-dischargeable debts.
You have to file a separate petition detailing your hardships along with all the other documents of your bankruptcy and student loans can be discharged. In this petition you need to prove:
- Your current financial situation is bad and if you continue paying the installments you won’t be able to maintain a minimum standard of living.
- You have made sincere efforts in the past to repay the loan.
- Your bad financial situation is likely to continue.
However, courts are very strict on discharging student loans in bankruptcy and it is advisable to only opt for bankruptcy when you have no other alternative left.
Even though you can’t completely eliminate your student loans, you can pay it back under chapter 13. By declaring chapter 13 bankruptcy, you are saved as no collection agency can contact you and you can repay all your debts through a repayment plan. For declaring chapter 13 bankruptcy and student loans’ repayment, you need to prove that you have a monthly income and you have some disposable income after eliminating all your expenses.
However, if you can’t declare bankruptcy and student loans also can’t be paid back, then the government can:
- Charge collection fee and commission fee on the penalties and interest you already owe.
- Your income tax refund can be withheld till you clear your student loan.
- Sue you.
- Take some portion of your income every month and use them as a payment to your student loan.
Another option by which you don’t have to declare bankruptcy and student loans are also paid back is to talk with your lenders honestly. You can talk with them frankly about your financial situations and ask for an extension or you can work out a repayment plan with them. Also, you can consolidate all your debts into one debt so repaying them becomes easier and cheaper as then you will have a low interest rate.
Before taking out a student loan, it is important to know that no matter what, you do have to pay it back. There are some exceptions under chapter 7 bankruptcy and student loan can be discharged then but it is extremely rare. Under chapter 13 bankruptcy, student loans can be repaid by working out a repayment plan. But the best way, is to talk with your lender and come up with a solution beneficial to both the parties.