Tag: undue hardship

Some Ideas About Easing Student Loan Debt Burden

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In the last blog, we discussed whether the government will just forgive student loans. The skeptic in me sees this as a long shot. So, what can be done, short of forgiving all students loans, that can ease the burden on borrowers? We are talking federal loans because that is the bulk of the $1.5 of outstanding student loan debt. Here are some ideas:

  1. Eliminate or significantly reduce origination fees. Right now, undergrads are paying a 1.062% origination fee on their Stafford loans. Not onerous. But, let’s look at Parent and Grad Plus loans. The current origination fee is 4.248%. That is highway robbery! Borrow $100K, owe $104,248 right off the bat. Not right. Reduce the origination fee to 1%.
  2. Decrease the interest rates. Right now, interest rates are 4.53% on Stafford loans. But, the interest rate for Parent and Grad Plus loans is currently 7.08%. There is no reason that the interest on Parent and Grad Plus loans should be any higher than Stafford loans. The interest rate should rate should be fixed at say, 4%. And stay at that rate. Yes, it could be a subsidy to the borrower if interest rates increase, but it is much less a subsidy than forgiving all loans.
  3. Right now, federal loans can be forgiven in an income based repayment plan after 20 years (depending on the program). However, after the loan is forgiven, you have to pay federal income tax on the amount forgiven. Out of the frying pan and into the fire. Any cancellation after years of payments should not be a taxable event.
  4. Amend the bankruptcy code on discharge of student loans. Prior to 1978, student loans were dischargeable in bankruptcy. The Bankruptcy Code of 1978 allowed a discharge for undue hardship or after 5 years of payments. In the 1980’s, the law was amended to allow discharge for undue hardship or after 7 years of payments. In the 1990’s, only proving undue hardship translated into a discharge. Undue hardship is extremely difficult and costly to prove. In NJ, you must show that if you paid your loan, you could not maintain a minimal standard of living, that situation will continue for the life of the loan, and you made a good faith effort to repay the loan. The problem for college grads is that the statistics show that their incomes tend to increase the longer that they are out of school. So, it is difficult, absent some disability, to convince a court that your inability to maintain a minimal standard of living will continue for 10-20 years. Go back to the discharge after 5-7 years of payments.
  5. Give employers tax incentives if they contribute to employees’ student loans. The employer gets a deduction, and the contribution is not taxable income for the employee. A recently introduced bill will allow employers to contribute up to $5250 per year tax free to be used for student loan repayment.

Final thought. We have to look at the source of the problem. That is that college and grad school in the US are way too expensive. Over the last 30 years, those costs have risen at twice the level of inflation. It is beyond my pay grade, but something has to be done to bring these costs down.

Bankruptcy Court Grants Partial Discharge of Student Loan

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In August, 2019, a Bankruptcy Court in Oregon granted a partial discharge of a student loan owed by an attorney who represents indigent criminal defendants. The attorney paid her student loans for 11 years. Notwithstanding, she owed about $198,000 to ECMC on federal loans, and over $50,000 on private loans sold to National Collegiate Student Loan Trusts. The Debtor defaulted on the NCSLT loans. The trusts accelerated the loans and filed suit.

The Debtor filed under Chapter 7 and then filed an adversary proceeding to discharge the student loans. The Debtor settled with ECMC to allow an income based repayment under REPAYE. Based on her income, the monthly payment to ECMC was set initially at $479 per month. She went to trial against the trusts.

To obtain a discharge of a student loan debt, a debtor must show that excepting the debt from discharge would impose an undue hardship on the debtor and the debtor’s dependents. Undue hardship is not defined in the Bankruptcy Code. In determining whether an undue hardship existed, Oregon court applied the Brunner test. (It should be noted that bankruptcy courts in New Jersey also apply the Brunner test.)

Under Brunner, to show undue hardship, a debtor must demonstrate that, given current income and expenses, she cannot maintain a minimum standard of living if the student loans were to be paid according to their terms; that this situation is likely to persist for a significant portion of the repayment period; and the debtor has made a good faith effort to repay the loan. In many cases, the second prong of the test (situation likely to persist) creates difficult proof problems for the college educated, younger debtor without health issues.

The debtor’s schedules indicated negative income of $474. However, the Court found that some of her expenses were not reasonable and were backed out. Given the monthly payment to ECMC, however, the Court found that the Debtor could not maintain a minimal standard of living if she had to pay the NCSLT loans which could come to over $900 per month based on the Oregon wage garnishment statute. That got the debtor over the first prong of Brunner. In regard to the second prong, the court found that the debtor was in a niche practice and her opportunity to generate more income over the life of the loans was not realistic Moreover, if her income increased, her monthly payment to ECMC would increase. I believe that judge conducted the proper analysis of the second prong; however, many courts would have looked at her age and law degree, and concluded reflexively that she could have sufficient future earning power to make the payments.

The Court also found that the debtor acted in good faith. 11 years of payments coupled with the fact that the trusts were under no requirement to give the debtor an income based repayment plan that she could afford.

The Court found that the debtor proved an undue hardship under the Brunner test. However, the Court did not discharge the NCSLT loans in total. Because some of her expenses could be cut, and there was a likelihood that her income could increase somewhat in the future, the Court discharged roughly $35,000. However, the Court said that if the debtor trimmed her expenses, she could afford to repay $16,500 of the NCSLT loans at 0% interest.

I believe this is a good result based on a thorough analysis by the judge. However, we are talking about an unpublished opinion out of Oregon. NJ bankruptcy judges are not bound by this opinion but should consider the thoughtful analysis of that court.

Student Loans and Bankruptcy- Another Perspective

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Frequently, I have someone call me to inquire about bankruptcy because they cannot afford to pay their student loan debt.  I explain to them that bankruptcy discharges student loans only if the debtor can demonstrate to the court what is called an “undue hardship”.  While under the right circumstances, a debtor can prove “undue hardship”, it is a very high hurdle for most prospective debtors, and expensive  Not only do you have to pay for the bankruptcy, you are required to file an adversary proceeding; that is, a lawsuit within the bankruptcy.  To the extent that the lender opposes the discharge, this means all the elements of litigation- pleadings, discovery, court conferences, motions and trial.  It adds up.

However, that does not mean that bankruptcy cannot be part of a strategy to deal with your student loan debt.  Just as the average homeowner is not going to get out of paying her mortgage, the average student loan debtor is not going to be able to immediately walk away from her student loan debt.  But, you can take steps to make the payments affordable so that you are not sued (if private loan) or subject to an administrative garnishment or social security intercept (if a federal loan).

How can bankruptcy help?  Well, lets say you have $100,000 in student debt and make about $50,000 per year.  You are single with no dependents.  Your rent is high because rents are high in northern  NJ.  Your withholding taxes take 20-25% of your gross income.  Utilities, cable, phone, food, car loan or lease and insurance,an occasional night out (the basics).  Your budget is tight so you used the credit cards they sent you.

So you have $30,000 of credit card debt, about $5,000 of medical expenses that the insurance did not cover. Besides the basics, you are looking at about $500 in monthly payments for credit cards (just above minimums) the hospital (so they don’t sue you).  And then you have to pay your student loans.

A standard repayment in this example is over $1000 per month. But  Income Based Repayment ( IBR) and  REPAYE are less than half that.  Getting close.  If somehow, you could get rid of some of that non-school loan debt, you might be in a position to afford the student loan debt.

A Chapter 7 bankruptcy could discharge the credit card and medical debts.  That would free up over $500 per month.  More importantly, those underlying debt are discharged.  Gone forever.

When you come to Kevin Hanly, Esq. LLC for a student loan analysis, we look at your entire financial picture to arrive at a strategy to make your student loan debt more affordable.  Most times that includes an income based repayment plan. Sometimes, it includes considering and maybe filing bankruptcy.

To get a better idea how bankruptcy works, you can check my bankruptcy website and blog at bankruptcy.kevinhanlylaw.com.