I bet you know someone with six figures of student loan debt. Maybe that’s how much you have, or close to it. Much has been said of the student loan burden carried by millennials and how it limits their ability to buy homes and cars and make other big life decisions. A friend of mine even calls it the “millennial tax,” arguing that this generation funds the government with interest payments on their ever-ballooning loan balances.
Paying hundreds of dollars a month for student loans can feel impossible to recent graduates making an entry level salary.
If you’re struggling or unable to pay your student loan, you may wonder if you can get rid of it. After all, you can stop paying just about any other debt if you file for bankruptcy. But federal student loans (as opposed to private bank loans) are notoriously difficult to walk away from.
Even if you declare bankruptcy, discharge from your student loan isn’t automatic—it’s a separate process. In this article we’ll explain your options for student loan forgiveness, cancellation, and discharge. We’ll also describe the bankruptcy process for discharging student loans.
Forgiveness, cancellation, or discharge: what’s the difference?
You may have heard of loan forgiveness programs for certain types of professions or the possibility of loan cancellation in circumstances such as the recent closure and bankruptcy filing of ITT Technical Institute. But the only real guaranteed situation for federal student loan discharge is death. However, discharge through personal bankruptcy is possible, though rare.
Before we look at the process for bankruptcy discharge, let’s explore the difference between three important terms:
- Forgiveness: “The release of the borrower’s obligation to repay all or a designated portion of principal and interest on a student loan.” The two main federal loan forgiveness programs are for public service and teaching. Eligibility requirements apply and you must continue to make payments on your student loans until you become eligible for forgiveness.
- Cancellation: This is the same as forgiveness, but happens under different circumstances. The main federal loan cancellation program is the Perkins Loan Cancellation and Discharge. This is for borrowers who work in certain professions or perform a qualifying type of public service.
- Discharge: “The release of a borrower from the obligation to repay his or her loan.” To receive a discharge, you must meet one of the following criteria: your school closes in the midst of your enrollment, your college closes up to 120 days after you withdrew, you can prove you have a permanent disability, you’ve filed for Chapter 7 or Chapter 13 bankruptcy and the court decides that repayment of your loan would cause “undue hardship” for you and your family, you’re the victim of institutional fraud or identity theft, or your school misled you or otherwise engaged in misconduct (called borrower defense discharge). Finally, there is discharge due to death, as mentioned earlier, but of course that won’t help you now.
How does bankruptcy discharge work?
According to the U.S. Department of Education’s Federal Student Aid office, “You may have your federal student loan discharged in bankruptcy only if you file a separate action, known as an “adversary proceeding,” requesting the bankruptcy court find that repayment would impose undue hardship on you and your dependents.”
What counts as undue hardship? That is up to the court to decide. You’ll likely find that what feels unduly hard to you, such as being unable to save and buy a house, may not qualify in the eyes of the court.
There are two types of bankruptcy, Chapter 7 and Chapter 13:
- Chapter 7: Known as the liquidation option, people who file for Chapter 7 bankruptcy will have to sell off all nonexempt assets through a bankruptcy trustee in order to pay creditors.
- Chapter 13: This bankruptcy option is more like debt consolidation. People who file for Chapter 13 bankruptcy will make installment payments to creditors through a three to five-year repayment plan administered by a court-appointed trustee.
As you can see, it may be possible to pay off your student loan through bankruptcy without filing an adversary proceeding. This of course depends on your loan balance and–for Chapter 7–the value of your assets. Most people struggling to pay off their loans probably don’t own enough assets to make filing for Chapter 7 worthwhile.
Chapter 13 comes with the possibility of debt discharge at the end of the repayment period. However, some debts are ineligible for discharge under Chapter 13 including “debts for most government funded or guaranteed educational loans…” And if your student loans haven’t been repaid by the end of the three to five-year period, your only option for discharge is to file a separate adversary proceeding.
How likely is discharge for undue hardship?
Most articles written about federal student loans emphasize the difficulty of obtaining discharge. But a 2011 study found that close to 40 percent of debtors seeking a discharge were granted one by the judge. Still, that doesn’t mean it’s easy or even desirable. Debtors who win a hardship discharge were more likely to be unemployed, lower income, and burdened with medical debt. And Attorney Shannon Achimalbe describes the experience of filing for bankruptcy as “a long, invasive, and contentious fight”.
While student loans aren’t automatically cancelled when you declare bankruptcy, you can apply separately for a hardship discharge. It may be challenging to prove undue hardship, but at least the possibility exists for people in desperate circumstances.
If you’re not at that point yet, but still have trouble making your loan payments, there are other steps you can take. Try getting a side gig, consolidating your loans, or arranging a different repayment plan.