With an estimated $1.6 trillion owed in student loan debt nationwide, it comes as no surprise that solving the student loan crisis has been at the forefront of most political campaigns in 2020. However, many argue that the solution to the problem is much simpler than just forgiving student loan debt. In fact, the answer to solving the student loan crisis could lie in the United States Bankruptcy Code.
Traditionally, student loans have been all but impossible to discharge in either a Chapter 7 or Chapter 13 bankruptcy case. Since the creation of the Higher Education Act in 1965, Congress has continued to add rules that make discharging federal student loan debt more and more difficult in bankruptcy. In 2005, private student loans were added to the list of debts that were difficult to discharge in bankruptcy, regardless of how much the filer was struggling financially.
Courts created the undue hardship test to determine whether the filer should be allowed to discharge his or her student loan debt. The standard required to pass this test varied by district and the requirements were often far too difficult to meet. Additionally, the filer was required to file a separate legal proceeding within the bankruptcy case to discharge the debt, and opening this proceeding allowed the loan servicer to fight the discharge in court. The costs, time, and uncertainty surrounding whether the filer would even be successful in court kept many borrowers from pursuing a bankruptcy case, simply struggling to pay on the debt or even defaulting on what was owed.
According to the Pew Research Center, approximately one in every five former students is in default on his or her loans. The staggering statistics of borrowers defaulting on their loans is why political candidates have added student loan reform to the list of issues addressed on the campaign trail.
The process to acquire a federal student loan is fairly simple. The federal government issues student loans regardless of the borrower’s ability to repay or income. Every year, the cost of education is increasing, as universities realize that the loans taken out by their students will absorb the extra tuition costs and fees added every year. For-profit colleges have also jumped on board, realizing the income opportunity that exists by enticing students to attend their institutions by taking out federal loans. All parties know the borrower will never be able to escape his or her debt. It must be paid. It is for this reason that student loan debt is now the second largest category of consumer debt, just after mortgages, in the U.S. Over 42 million American consumers carry some form of student loan debt.
The effect on the economy has been felt by this outstanding debt. Many younger borrowers state that their student loan debt has kept them from making big purchases, such as buying a new home. Student loan debt can make it difficult to be approved for financing for many larger purchases, including homes, cars, and more. Student loan reform advocates argue that cancelling or forgiving student debt would stimulate the economy by giving these borrowers extra funds to make these big purchases.
However, the pushback has been strong from borrowers who argue that it would not be fair to forgive student loan debt for millions while they already struggled to pay back their debts in full. Additionally, the tax effects that would come along with forgiving such a large amount of debt for each borrower would be significant, as well.
It is for this reason that many financial experts argue the solution to the problem lies in allowing student loan debts to be discharged in consumer bankruptcy cases. Borrowers who are struggling financially and cannot pay back their debts would be able to discharge their debts in full instead of just a portion of what they owe. Those advocating this method of solving the student loan crisis also believe that by opening up bankruptcy as a way of discharging the debt will force the government and other financial institutions to rethink their standards when approving borrowers for loans. Some level of responsibility would be put on the lender to properly vet the candidate.
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For borrowers who are struggling with student loan debt, relief options are available. Many student loan borrowers are unaware that they have rights and repayment options available to them, such as postponement of loan payments, reduction of payments or even a complete discharge of the debt. There are ways to file for bankruptcy with student loan debt. It is important you contact an experienced Miami bankruptcy attorney who can advise you of all youroptions. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
