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Education Department Reviewing Discharge of Student Loans in Bankruptcy? – Not so Fast

After a 20 year hiatus, Student loan borrowers may finally have their day in Bankruptcy Court.

The Education Department said this week it will review when borrowers can discharge student loans – an indication it could become easier to expunge those loans in Chapter 7 or Chapter 13 bankruptcy.

The Department said it is seeking public comment on how to evaluate undue hardship claims asserted by student loan borrowers to determine whether there is any need to modify how those claims in bankruptcy are evaluated.

As of now, it is almost impossible to discharge student loans in bankruptcy. The rule of thumb in New York has always been the “Brunner” test, which, in simple English, boils down to “if you can work, you can afford to pay your student loans.”

Meanwhile, college-loan balances in the United States have jumped to an all-time high of $1.4 trillion, according to Experian. The average outstanding balance is $34,144, up 62 percent over the last 10 years. Roughly 4.6 million borrowers were in default as of Sept. 30, also up significantly from previous years.

The national student loan default rate is now over 11 percent, according to Department of Education data. Student loans are considered in default if you fail to make a monthly payment for 270 days. A loan technically becomes delinquent the the first day after you miss a payment.

Individuals with “unmanageable” student debt have limited options at the present time:

1. Payments may be able to be postpones with a deferment or forbearance. A deferment lets you put your loan on hold for up to three years. If you don’t qualify for a deferment, forbearance lets you temporarily suspend payments for up to one year.

2. Income Based Repayment – income-based repayment plans allow you to pay a percentage of your income rather than a flat rate, as long as you are under a certain income threshold.

3. Public Service Forgiveness or Disability Discharge – In certain situations, certain federal student loan can be forgiven, canceled or discharged, although that often comes with its own administrative hurdles

As of now, do not set any false expectations. This is nothing more than a tweet from the current Administration, and we know how few, if any have been acted upon by Congress…..

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