According to the Institute for College Access and Success, college graduates in California average $21,382 in student loan debt. As students graduate into a tight job market, they may find it tough to pay back student loans. Inability to pay back loans may have some people considering bankruptcy or refinancing, but are student loans eligible for discharge?
The short answer to discharging student loans through bankruptcy is usually "no," but the longer answer may be "yes" if the client and attorney take the right steps. Refinancing options are still available to student loan borrowers who are not eligible for discharge via bankruptcy or may not be interested in bankruptcy at all.
Let's examine when student loans are eligible for discharge in bankruptcy and how to qualify for refinancing without bankruptcy.
The Brunner Test
Generally, federal student loans cannot be discharged in bankruptcy because they are funded by the government. Therefore, the government does not want to lose out on its money. However, there is room in the law via the three-part Brunner Test to discharge student loans for borrowers and their dependents who face an "undue hardship."
To qualify for discharge via bankruptcy, a borrower must prove three elements:
- He or she cannot sustain a minimal standard of living when paying loans.
- He or she will not have the ability to pay the loans in the future.
- He or she has made good efforts to repay the loan.
If all three elements are met, the borrower may be eligible to discharge student loans. If the elements are not met, or the borrower is only interested in refinancing, expanded options may soon be available.
What about refinancing?
A group of U.S. Senators recently asked the Internal Revenue Service and the Treasury Department to provide new guidance that could allow more borrowers to refinance student loans through non-profit groups. The legislators cite more than $1.3 trillion in student loan debt nationwide as the need to push refinancing. The measure is still being considered by the agencies involved.
Many see widespread access to higher education as a cause that is necessary to the betterment of society. However, as the student loan bubble grows, the government may have to consider new measures to ease the burden of debt. As the law changes, student loan borrowers can rely on the advice of a local attorney to find balance in their financial obligations.