Student debt isn't just a young person's problem. Americans of all ages are struggling with monthly loan payments -- payments that eat up a large chunk of their income and prevent them from meeting other key financial goals. The problem has gotten so bad, in fact, that some borrowers risk never managing to pay off their student loans in their lifetime.
One senator, however, is trying to change that.
Some much-needed student debt relief
In May, Illinois Senator Dick Durbin introduced a new bill called the Student Borrower Bankruptcy Relief Act of 2019. The goal? To make student loans dischargeable in bankruptcy.
Currently, most student loan borrowers who file for bankruptcy can't use it to eliminate that debt. Under Chapter 13, filers merely reorganize their debts rather than unload them, so the option to get rid of student loans completely doesn't even apply. Chapter 7, on the other hand, is a personal liquidation. Qualifying for Chapter 7 is trickier than Chapter 13 because filers need to pass the means test -- a measure of income relative to the median income in the filer's state. Once approved, however, Chapter 7 filers can discharge many of their debts completely. Student debt, unfortunately, has largely been an exception.
Now to be clear, there are some instances where student loans can be wiped out in a Chapter 7 bankruptcy. But getting to do so is rare. For student loans to be discharged completely, filers must prove that they have absolutely no means of maintaining a reasonable standard of living in conjunction with making loan payments. They must also prove that their present financial situations are unlikely to change for the duration of their loan repayment periods.
Since these guidelines are open to interpretation, many courts are loathe to grant borrowers leeway. Case in point: In a recent survey of U.S. bankruptcy cases, only four instances were identified where student debt was discharged as part of the process. If the Student Borrower Bankruptcy Relief Act is passed into law, many indebted Americans will have the option to wipe their slates clean and shake the burden of student debt, rather than risk carrying it with them into retirement or, worse yet, the grave.
Managing student debt
Borrowers who are currently struggling to keep up with their student loan payments do have options to explore that don’t involve bankruptcy (keeping in mind that filing for bankruptcy is a costly, stressful process that can impact one’s credit score for years). Those with federal loans can apply for income-driven repayment plans to make their monthly obligations more manageable. Federal borrowers also, in some circumstances, have the option to defer their loan payments during periods of financial hardship.
Private student loans don’t always offer the same protections as federal loans, but some lenders will work with borrowers who are currently, or at risk of, falling behind on their payments. A private lender might accept a lower monthly payment, or even agree to a period of deferment if the situation warrants it.
The fact that student loan debt is generally not dischargeable in bankruptcy is one of the reasons so many Americans feel trapped after having borrowed money for college. Though it’s too soon to tell what the future has in store for Durbin’s proposal, those struggling under the weight of student debt should explore their options for relief rather than sit back and bank on a proposal that’s still very far from becoming reality.