Student Loan Debt and Bankruptcy

In the past several months I have met with a large number of potential clients who requested information about their student loan debt and the availability of filing a bankruptcy to resolve the debt. Under the current bankruptcy laws passed by Congress, there are only very limited circumstances when student loan debt may be subject to a discharge. Most Bankruptcy Courts apply the “Brunner” test. Brunner v New York State Higher Educ. Services Corp., 831 F.2d 395 (2nd Cir. 1987). In order to meet the Brunner test, you must meet all three factors of the test. First, based on your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans. Second, your current financial situation is likely to continue through a significant portion of the repayment period. Third, you have made a good faith effort to repay the student loans. The Court requires you to meet all three of the Brunner factors and the burden to meet all three is very difficult. The standard under the current case law makes the discharge of the debt virtually impossible except in the most rare circumstances.

More disturbingly, most of the potential clients with whom I recently have met have enormous student loan debt. Often in excess of one hundred thousand of dollars. Often they have very little other unsecured debt like credit cards and almost always do not own real estate or any other significant assets. Most often they have reasonably good jobs, but after living expenses and student loan debt are struggling to make ends meet. This raises the bigger question of whether their college choice made financial sense in the first place.

Certainly, there are several professions that require a college degree, but several also have lower salaries. For parents of high school age children there should be frank discussions, regarding the choice of college and the field of study. Private colleges often have price tags in the $50,000.00 plus per year range, while state colleges often are in the $20,000.00 range. In order to help their children make good financial decisions, parents should be discussing the value of the degree relative to the occupation and annual earnings that the degree will afford their student. It may make more sense to attend a state university, if the student intends on entering occupations like teaching or social work where lower salaries and career earnings are expected. A private education and the loans the student may incur might be worth it for professions and occupations where salary and earnings are expected to be more lucrative.

More often than not, potential clients who have primarily large non-dischargeable student loan debt and very little other debt or assets question why they were not given more guidance on the financial ramification of their biggest financial decision of their young lives at age 18. Very often they lament that had they known about the impact of the enormous debt with which they would be saddled, most would have made different choices of college and or degree program.

Forbes magazine estimates that the current student loan debt in the United States is 1.2 trillion dollars. The class of 2014 was the most indebted with student loans ever. There is a looming student loan debt crisis, which may delay for a generation of people their purchases of homes, large investments or savings for retirement. Until Congress or the Courts act to confront this looming crisis, student loan debt will continue to be very difficult to discharge in bankruptcy.