What is Bankruptcy Discharge of a Student Loan?

How often would it be that incomes and savings would be sufficient to pay for all our education? The answer is – it is rare, if you are thinking of higher education in the United States. It is not just the cost of books and tuition fee, rather, many unplanned and unforeseen living costs that arise while earning a graduate or undergraduate degree. What is the solution then? One solution that has been in place since 1950s is the concept of ‘student loans’.

A student loan is specifically designed for students to pay for their education expenses and carry substantially lower interest rates and suitable repayment schedules to help students pay them back when they are capable of. Student loans are different from scholarships and grants and are supposed to be paid off. Student loans are broadly of two types- Federal student loans and Private student loans. The former type of loans is funded by the federal government and carries a fixed rate of interest which sometimes, is also tax deductible. Other than government agencies; banks and finance companies also offer student loans which are known as private student loans. Interest rates on private student loans are generally variable and higher than federal student loans. 

Student Loan Forgiveness Programs

Repaying a student loan is generally not as easy a task as is taking one. That’s when student loan forgiveness programs come into the picture. ? A student loan forgiveness programme is designed to help students pay full or a part of their student loan in exchange of the student pursuing a particular occupation or volunteering service.

In the US, student loan forgiveness programs are also aimed at directing individuals towards sectors of national importance where there is lack of qualified personnel. While there are student loan forgiveness programs available to both kinds of student loans; federal student loans are much more advantageous for such forgiveness programs. This is mainly because federal student loans qualify for the student loan forgiveness and discharge plans offered by the federal government which cover borrowers of different kinds under the varied programs that it offers.

Discharge of a Federal Student Loan

Discharge  of a loan means when the borrower is no longer liable to repay one’s loan. In other words, the loan is cancelled and the debt burden is removed. In the US economy, discharge of loan is generally associated with student loan, home loans and mortgages. There can be some other reasons as well for discharge of loan. The Federal Student Aide, an office of the US Department of Education offers for forgiveness, cancellation and discharge of student loans under different circumstances to help student borrowers in genuine need. One major reason for discharge of loan is bankruptcy of the borrower.  

Other than that, an individual might be eligible for a discharge if he/she withdrew from school but the school did not pay a refund that it owed to the U.S. Department of Education or in some cases, to the lender. There is another plan called The Federal Perkins Loan Cancellation that applies to individuals who perform certain types of public services or certain types of occupations such as Teacher, Member of the U.S. armed forces, Nurse or medical technician et cetera. Also, an individual with Federal Student Loan might qualify for Total and permanent disability discharge programme if they are incapable of arranging in any gainful activity because of physical or mental impairment.

Bankruptcy Discharge

To be able to avail discharge of a student loan due to bankruptcy, the borrower needs to prove his/ her bankruptcy to the bankruptcy court showing that repaying the loan would bring undue suffering for him/ her. The final decision of discharging the loan is made after adversary hearings in the bankruptcy court where the creditors can challenge the bankruptcy claimed by the borrower. Court uses three measures to determine the truthfulness of one’s bankruptcy claims.

Firstly, repaying the loan should imply that the borrower will not be able to have a minimum standard of living. Secondly, the alleged hardship of the borrower in repaying the loan should continue for a long duration while repaying the loan. Lastly, the court should see repayment efforts made from the borrower’s side before applying for bankruptcy discharge of loan; this generally implies a repayment history of about five years.

It is mandatory for a borrower to meet all of these requirements for his/ her loan to be discharged. Once the loan is discharged, the borrower need not worry about any further payments to be made towards the debt. Discharge of student loan due to bankruptcy also implies requalifying for federal student aide by the US Department of Education. One hindrance for students who are in need of such discharge but are unable to get their loan discharged is high legal fee is the representation of their case.

A popular  case of student loan bankruptcy discharge in which a law student Michael Hedlund was able to win his battle for bankruptcy confirms this problem. His case was represented by one of the top bankruptcy firms of the country without which his discharge would have been near to impossible. 

Conclusion

No one really ever wishes for bankruptcy. But we know less of what future may hold for us. Unemployment, medical issues, sudden mishaps or any unforeseen calamity might force an individual to apply for bankruptcy. With such possibilities existent, discharge of student loans due to bankruptcy surely benefits many, if not all. In the mid of criticism by some economist for high cost of subsidies, such discharge programs have succeeded in benefiting more people with each amendment and hopefully, would continue the legacy with coming years.