For people who have exhausted all routes of repaying their loans, but still are unable to make payments, bankruptcy can seem like the perfect solution. While declaring bankruptcy might eliminate all of your other debt, it is extremely unlikely that your student debt will go away. Since the 1970’s, legislature has become increasingly strict regarding bankruptcy and student loan forgiveness. Today, both federal and private student loans are exempt from bankruptcy, meaning that you will still be responsible for their payment. If you can prove “undue hardship,” you might be able to have them dismissed, but the overwhelming majority of people must still repay their student loans after declaring bankruptcy.
Federal student loans are not automatically discharged during bankruptcy. There are repayment programs targeted toward people who are experiencing financial strife. Graduated plans start out with lower monthly payments that gradually increase. This option is helpful for people who currently have lower incomes, but expect to make more money relatively soon. Income contingent plans and income-based plans calculate your payments based on your income and other lifestyle factors. With these plans, if you make regular payments for a certain amount of time, you could qualify for discharge. For those unable to make any payments at all, you might qualify for student loan deferment if you can prove that you are unemployed or are experiencing financial troubles. Forbearance is an option for people who cannot defer their loans. With forbearance, you temporarily stop making payments or make smaller payments, or you can extend your repayment period. These options could generate more overall interest, but they could provide relief for a short time. In some situations, you might qualify for federal student loan forgiveness if you fit one of the following criteria:
- Being a teacher or working in public service: Fulltime teachers who work for five consecutive years in low income schools could have up to $17,500 of their loans cancelled. People with certain jobs in public service may have the remainder of their loans forgiven if they make 120 repayments on their loans.
- School-related reasons: If your school closed prior to your certification, committed fraud, or did not follow withdrawal procedures, your student loans could be cancelled. You cannot have your loans forgiven just because you were dissatisfied with your program or are unable to find work in your preferred field.
- Disability: If you are able to prove that you are “totally and permanently disabled,” you can apply for a loan discharge. In addition to proof of disability, you must have become disabled after you borrowed your student loans.
- Death: If you die, your loans will be forgiven upon proof of death.
Forgiveness policies for private student loans vary between institutions, so ask your lender about loan cancellation or alternative repayment plans. Although bankruptcy will almost never eliminate your student loans, it could still be a good choice depending on what other debts you have. Explore all of your options before declaring bankruptcy, including postponing or reducing your monthly loan repayments.