LEGAL NEWS YOU CAN USE
Vol. 1 February 16, 2017 No. 6
Some Private Student Loan Debt Is Subject To Bankruptcy
Student loan debt collectors will be the first to tell you that you can’t get rid of your student loan in bankruptcy — that is, that congress provided them the same special protection as federal student loans. In theory they are partially correct, but in reality they are playing fast and lose with the facts!
As discussed in last week’s newsletter, the recipient of student loans — private or federal — can discharge (eliminate) their debt with proof of undue hardship, which involves a three to four part test (depending on the Federal Court of Appeals one’s state falls under).
If the student loan debt was not funded by a nonprofit institution, which likely means an entity other than the school or university, you may be able to discharge funds received that were not used for qualified higher education funding, i.e. for things other than for the cost of attendance. This may also include funds received that were not directly an educational benefit. An example of an educational benefit includes a scholarship for medical school based on the premise that student will provide low-income community work in in exchange, but fails to do so.
Additionally, student loans from private lenders can be discharged if made to students who did not attend an accredited school, which are listed as Title IV Schools by the Department of Education, or were provided funds for more than the cost of attendance. This includes a bar exam study program or loan to attend an unaccredited trade school.
Federal Student Loan Deferment is a Four Letter Word!With so many federal student loan payment options, many of which are based on one’s income, there is NO logical reason to request a deferment to pay back student loan debt. If you are unemployed or have insufficient income to make a student loan payment, your monthly payment may be as low as $0. Moreover, the clock would continue to tick off the number of years you were required to make a payment, with any debt still owed thereafter being cancelled/eliminated. Alternatively, a deferment simply allows the lender to charge you interest on the principal student loan debt and when the deferment is over, add that interest to to the principal amount, with interest now based on that higher amount of debt. Navient is facing a federal lawsuit over this specific issue — failing to tell borrowers of the advantage of selecting an income-based program during times of unemployment or low income versus the cost of deferment.