Student Loan

Obtaining a discharge of student loans is a rare occurrence these days, and when the loans in question are exclusively Federal loans, the chances of discharging the debt are slim.  The Nebraska bankruptcy court reinforced that reality in an opinion issued on January 8th.  See In Re Harris, Adversary Case #14-4001.

A disturbing trend in student loan litigation continues in this case of a debtor filing a Pro Se complaint—that is, to file a complaint without any attorney representation.  Most of the case law in student loan cases—and perhaps in consumer law in general—is frequently obtained by individuals who cannot afford to pay an attorney and so they opt to represent themselves.  There would probably be a lot more meaningful case law in this area if attorneys would manage the litigation, but as of yet there is no effective device to pay for the expensive litigation cost involved in such cases, a very unfortunate reality.

The facts:

  • Age: The debtor is 50 years old.
  •  Dependents: The debtor supports a 19 year old daughter with no disabilities.
  • Income: The debtor earns $38,000 per year but had earned as much as $55,000 per year at a previous job.
  • Physical Condition.  No mention of any significant medical issues were mentioned.
  • Marital Status:  Single
  • Federal Student Loan Balance:  $32,643
  • Private Student Loan Balance: $0
  • Income-Based Repayment Options:  10-year repayment plan based on income was available since the debtor worked for a non-profit hospital organization.

The Law:

  • Bankruptcy Code Section 523(a)(8) provides that a bankruptcy will not discharge any debt for student loans “unless excepting such a debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents

This litigation was doomed from the start.  After going through a list of the reasonable expenses of the debtor, the court zeroed in on the key factor of the case:  the debtor was eligible for a 10-year Income Based Repayment (“IBR”) since all the loans were Federal loans and she was employed by a nonprofit employer.   Under the Public Service Loan Forgiveness Program (“PSLFP”), administered by the Department of Education, federal student loans may be forgiven after a debtor makes 120 qualifying payments while employed by a government or nonprofit employer.  34 C.F.R. § 685.219(b).  Also, under the PSLFP program, any forgiven loan balance at the completion of the program is not subject to taxation—no 1099 Forgiveness of Debt form will be issued.  Since the debtor was able to complete this program by age 60, the court declined to discharge her student loan debt.

It is important for debtors considering an application for a Hardship Discharge of student loans to classify their loans into two separate categories:  (1) Federal Loans and (2) Private Loans.  Since Federal loans have increasingly flexible payment terms available, it is rare for bankruptcy courts to discharge these obligations in the absence of significant long-term medical ailments suffered by the debtor or members of the debtor’s household.  Private student loans, are more commonly discharged in bankruptcy proceedings, especially when lenders fail to offer debtors meaningful repayment options.

Image courtesy of Flickr and Thisisbossi.