For many owing student loans, the situation is bleak

For many years going to college was seen as a necessary step to getting the best and highest paying jobs. However, over the years, the expenses of higher education have ballooned exorbitantly, forcing students to finance their education through student loans. At graduation, many students have six-figure loans to repay. Add to that the weak economy and bleak job market that many graduates face and it can be a recipe for financial disaster for many.

Because of their inability to find a good paying job-or any job at all-many graduates find themselves having to file bankruptcy to relieve them of their debts. However, for the vast majority of them, their student loans will be next to impossible to discharge.

A history of bankruptcy and student loans

It was not always so difficult to discharge student loans in bankruptcy. Before the mid-1970s, student loans could be discharged as easily as credit card debt. After hearing a few reports of doctors and lawyers who discharged their student loans in bankruptcy, a resentful Congress passed a law in 1976 requiring students to wait at least five years before their loans could be discharged.

In 1998, wishing to protect taxpayers from students walking away from their loans, Congress made federal student loans nondischargeable in bankruptcy. After intense lobbying by for-profit companies, in 2005 Congress toughened the rules for private student loans, making such loans much more difficult to discharge.

Private student loans can be discharged in what are rare and extreme circumstances. Under the bankruptcy code, a private student loan can be discharged if the loan would impose an "undue hardship" on the borrower. However, Congress never defined what an "undue hardship" is, so the definition has been left to the courts. Nationwide, some courts disagree on the definition of "undue hardship", but in most cases, the borrower must show:

  • The borrower has made good-faith efforts to repay the loan by finding a job, minimizing expenses etc.
  • The borrower cannot maintain a minimal standard of living based on current income and expenses
  • The borrower's current financial situation is likely to continue for most of the loan's repayment period

Needless to say, it is currently very difficult for a borrower to successfully claim undue hardship, as the law requires the borrower to essentially prove that he or she cannot pay the loan and likely will never be able to. Unfortunately, unless Congress chooses to amend the bankruptcy laws or the Supreme Court formulates a new standard, the law is unlikely to change. Although some members of Congress have introduced bills in the past that would allow students to discharge private student loans, the bills have never gained traction.

Consult an attorney

Although student loans are difficult to discharge in bankruptcy, most other types of debt do not carry the same restrictions. If you find yourself overburdened by student loans, bankruptcy may allow you to restructure or discharge other types of your debt, freeing up more funds for student loan obligations. An experienced bankruptcy attorney can recommend a debt relief option that would be best for your circumstances.