STUDENT LOANS--DIDN'T YOUR PROFESSORS HAVE A PLAN FOR YOU!!

Time and Time again, I see clients with an enormous amount of student loan debt.  Many times the debt is in excess of 5 figures.  Unfortunately, student loan debt is not dischargeable in bankruptcy, and it is not a priority unsecured debt like taxes or domestic support obligations.  Yes, there is a hardship exception to discharge student loan debt,  but the case law indicates that such a discharge applies in very limited circumstances.  For instance, if the debtor has a permanent disability, then the student loan debt would be dischargable. 

I think we, the American citizenry, ought to lobby Congress and change the law.  When students borrowed all of this money, no one undertook to underwrite the student loans to determine whether they made economic sense.  The situation is particularly acute in the current economy because many graduates are unemployed , underemployed or have not received the salaries they anticipated.  And forbearing or deferring the student loans is not a solution since many loans have negative amortization features.  Also student loan interest is tax deductible, and one cannot take the deduction if he/she is not paying the loan.

ONE SOLUTION: on an experimental basis, we are taking a few Chapter 13 cases in which we are characterizing the student loans as long-term debt.  Some courts have allowed student loans characterized as long-term debt to be paid in the ordinary course while credit card debt and other unsecured debts are given a lower priority.  When such plans are confirmed, the debtor is able to devote more of his/her income to pay-off the student loans sooner.  

We'll keep you posted whether the local bankruptcy courts approve the characterization of student loans as long-term debt with a higher priority.

This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.