Given the large number of college students in Austin, many of my bankruptcy cases are with individuals who have a significant amount of student or parent loan debt. Unfortunately, based on changes to the bankruptcy law in 2005, the answer to the question posed above is “almost nothing.” Student loans are no longer dischargeable in a bankruptcy proceeding, unless you pass the “Brunner Test” which I will describe below.
Today the nation is confronting a student and parent loan debt crisis. According to a September article in Time Magazine, nearly 1 in 5 households owe federally guaranteed student loan debt. This is being compared to the subprime credit lending that precipitated the financial crises of 2007-9, but it doesn’t portend another round of epic institutional failures. It does, however, create a considerable drag on economic recovery when our crop of newly minted college graduates and their parents use all their otherwise disposable income to repay this debt instead of buying houses and cars.
The US Court of Appeals in a landmark case brought by Marie Brunner affirmed in 1987 a District Court ruling that established what is now known as the “Brunner Test” and is applied in determining hardship with respect to discharging student loans. The three main elements are these:
(1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Student and parent loan servicing organizations are quite willing to grant temporary reductions in payments based on income or hardship, and there are circumstances where volunteer work or participating in certain professions can over time eradicate student debt. But, otherwise, these organizations and bankruptcy trustees in general have taken a pretty harsh line in granting relief from student loans. Satisfying the Brunner Test for all practical purposes requires you to be living in poverty with no hope of working your way out. If you have a skill or profession from which you can earn a decent living, plan on sending a portion of that living to pay your student loans. Even if you are surviving solely on Social Security, count on 15% of that to be sliced off the top by the government until your student loans are fully repaid, even if you have to live to 180 to accomplish that goal. And, if you try to escape payment, your credit score will be damaged, and you may be subject to harsh collection efforts.
As your Austin bankruptcy lawyer, I encourage you to explore sites like finaid to get a full understanding of student loans and how best to deal with them under your particular circumstances. Every situation is different, and, if your case might make you eligible for student loan relief, I will do my best to seek that. But, I’m trying to set your expectations properly. My personal view is that the student loan situation will rise in political priority and will within the next couple of years gain the attention of Washington. There may well be some new rules, or even some general amnesty. If nothing else, lowering the egregious interest rates on these loans, currently in the 7% range when the prime rate is near zero, could give some relief to a fifth of the country. But, until then, like all aspects of bankruptcy filings, we are driven by the very specific rules currently in effect.