October 26, 2014

My Student Loan Debt is unmanageable. Can I discharge it through bankruptcy?

Prior to October 7, 1998, student loan debt that had been in repayment for more than seven years from the date of bankruptcy filing was dischargeable. That seven year provision was eliminated with the bankruptcy law change in 1998. Student loans are now non-dischargeable under Title 11 U.S.C. Section 523 (a)(8) of the U.S. Bankruptcy Code unless a case of undue hardship exists.

It is very hard to qualify for the undue hardship provision. Most courts only grant a petition for undue hardship if the debtor is elderly, has high medical costs, and supports at least one dependent.

For those debtors who do not qualify for the undue hardship provision, there is one other option for discharging student loan debts. A new option for repaying student loan debt was established alongside the College Cost Reduction and Access Act of 2007. The Act created the Public Service Loan Forgiveness Program, in which public service workers can make student loan payments for ten years, at which point the remaining principle and interest will be fully discharged. Better yet, the amount of payment for ten years will be income-contingent or income-based. The program extends to a broad number of public service jobs including, government, military, police, fire, non-profit employees, public school teachers, and social workers, just to name a few.

Not all student loans qualify for this program. However, if the debtor’s loans do not qualify, they may be able to consolidate into a qualifying loan.

Another issue with this program is that it may create forgiveness of indebtedness income which may be taxed by the IRS. It is still unclear whether or not the IRS will exempt this program from income tax by 2017, when the first loans under this program will be forgiven.

To find out more information about the Public Service Loan Forgiveness Program, you should visit http://www.finaid.org/loans/publicservice.phtml or http://loanconsolidation.ed.gov/ or contact the Department of Education at 1-800-557-7372.

 

[UPDATE:  New student loan forgiveness programs have been added since this article was written.  Do some internet searching on "student loan forgiveness" to find out what is available.]

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