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Should Student Loan Debts Be Forgiven?

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Published by Greg Martucci at January 25, 2016
College Graduation

The U.S. Supreme Court May Give Guidance to Bankruptcy Courts

With our nation’s student loan debt now surpassing $1 trillion and projected to rise to $2.5 trillion in the next decade, something has to change soon to keep the American Dream alive.

While incomes remain stagnant, the cost of college tuition keeps rising at alarming rates. Compounding the student loan debt is the popular choice of for-profit colleges and universities that produce slick advertising aimed at marginal students, helping them secure financial aid for expensive degrees, leading to exciting careers.  If they do graduate, these students often find that the jobs in their chosen fields don’t exist, or that the degree from their school isn’t recognized by the government or private employers.

What Are the Options?

For those overwhelmed by student loan debt, bankruptcy is normally not an option. The general rule is that a government-guaranteed student loan is not dischargeable in bankruptcy absent an “undue hardship” on the debtor.  The Bankruptcy Courts have struggled to define “undue hardship.”  Most federal courts use the “Brunner” test which requires (1) that the debtor prove he cannot maintain a “minimal standard of living” for himself and his dependents if forced to repay the loans, (2) that this state will continue well into the future, and (3) that he has made a good faith effort to repay the loans. Other federal courts use the “totality of the circumstances” test which would consider other factors to determine “undue hardship” and not be so stringent.

Student Loan Debt and Bankruptcy

In a case pending before the U.S. Supreme Court, Mark Tetzlaff, a 57-year-old man with an MBA from Marquette University and a law degree from Florida Coastal School of Law, is seeking to have his $260,000 undergraduate student loan debt discharged in bankruptcy.  He is claiming that it would become an “undue hardship” for him to live if he has to pay back the student loan. The Courts, so far, have ruled against him. He has twice failed the bar exam, lives with his elderly mother, and cannot find employment because of his criminal record, which includes misdemeanor convictions, and he has struggled with depression and alcohol abuse.

If the Supreme Courts agrees to hear the case, it could offer some relief to bankrupt borrowers, at the expense of the Department of Education.  Alternatively, the Department of Education may agree to cancel student loan debt if aggrieved borrowers can prove they were defrauded by the school. But then, the burden would be shifted to the taxpayers.

Although student loans are typically not dischargeable under current law, a bankruptcy discharge can result in forgiveness of many other types of debt.  If you would like to learn how bankruptcy could benefit you, contact us at 630-980-8333 to schedule your free initial office consultation.

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