Student loan debt is rising at an alarming rate, but undue hardship on student loans might be an option for some. The total now exceeds $1.5 trillion, and 10.7% of the total debt is 90+ days delinquent or in default.
The weight of this debt is crushing the financial stability of the average American – over 44 million, to be exact.
The Brookings Institute researchers say that almost 40% of borrowers will default on their student loans by 2023. And Jerome Powell, the Federal Reserve Chairman, recently said that the student debt crisis has the potential to hinder our economic growth.
So if you’re trapped under this pile of debt, you may be wondering how to get out from under it. One way is to file bankruptcy and claim “undue hardship.” But is this option right for you?
Read on to learn more about undue hardship, how to use it, and whether or not you qualify. You’ll also discover a few other options to help you get your student debt under control once and for all.
What is undue hardship on student loans?
One way to eliminate debt is by filing for bankruptcy. However, student loan debt is not covered in bankruptcy proceedings unless you take additional steps. You must file an adversary proceeding and ask the judge for relief under “undue hardship.”
Joshua Cohen, a lawyer specializing in student loans, says, “The first problem we run into is that Congress has never defined what exactly an ‘undue hardship’ is. That left the courts to figure it out. The decisions are all over the place.”
When Congress modified the laws to exclude student loans from bankruptcy in 1976, “undue hardship” was not defined. Congress passed on the opportunity to define “undue hardship” when they toughened the bankruptcy laws against student loan debt in 1990, 1998, and 2005.
Robert Farrington, an expert on student loans, says that “undue hardship is also very difficult to prove for Federal student loan borrowers because of income-driven repayment plans that end with student loan forgiveness.”
How does the Brunner Test apply?
Because Congress didn’t define undue hardship, it was up to the courts to decide. The courts came up with the Brunner Test in 1987, after the case Brunner v New York State Higher Education Services Corp.
The Brunner Test is the most common test used to determine whether you can get student loan debt discharged in bankruptcy. It evaluates a debtor based on three things:
- Can a debtor maintain a “minimal” standard of living if forced to repay the student loans?
- Are there additional circumstances that will remain the same throughout the expected repayment of the student loans?
- Has the debtor made good faith efforts to repay the loans and communicate with the lender?
All Federal courts of appeal, except the First and Eighth Circuits, have adopted the Brunner test.
Totality of Circumstances
To make matters even more confusing for debtors, the 8th Circuit Court uses the Totality of Circumstances test rather than the Brunner test. With this test, the court will consider all the facts in a debtor’s case.
Can undue hardship eliminate student loans?
The process is difficult and time-consuming, but it can be done. If you are successful with your undue hardship petition, one of three things will happen:
- The balances will be completely eliminated.
- Your debt will be reduced, but you have to pay the rest.
- The loan balances will remain unchanged, but the interest rate will be lowered.
Most people, however, will likely not qualify under the current rules.
Will eliminating student loan debt become easier?
The Department of Education (DOE) recently sought public comment on the evaluation of undue hardship claims. This may be a step in the right direction towards a policy change.
However, the DOE can’t change bankruptcy law as they are not a legislative body. So, it’s unclear what purpose these comments will serve and whether or not it will influence any sort of change.
What are my other options?
Fortunately, there are other ways you can simplify your student debt and pay it off once and for all. Your best option will differ depending on whether you have federal or private student loans.
Read our guide on federal vs. private student loan consolidation to understand the differences.
Federal student loans
You can also apply for student loan forgiveness and income-driven repayment plans. These plans could help you keep up with your monthly payments and pay off your student debt more quickly.
Private student loans
With private loans, you have other options such as student loan refinancing. When you refinance through a private lender, you can consolidate all of your loans – private and federal – into a brand new loan with new terms and conditions.
Doing so enables you to:
- Negotiate a new repayment term, interest rate, and type of rate (fixed or variable)
- Lower your interest rate and reduce your monthly payment
- Make only one monthly payment, rather than several
- Release a co-signer from the original loan
- Include both federal and private student loans
Employer student debt benefits
Another option is to work for a company that offers student loan repayment benefits.
Employers who offer this will make recurrent payments – either monthly or yearly – to help eligible employees pay off their student debt. Benefit plans vary from company to company.
Your next steps
If you’re struggling to keep up with student loan payments, the good news is that you have options. You’ll want to make sure you explore every one of them including undue hardship, federal consolidation, private refinancing, and more.
However, navigating the complex world of student loans isn’t always easy to do on your own. This is especially true if you’re on the brink of default.
Consider working with a student loan lawyer who can simplify the process and guide you in the right direction. He or she can help you understand your options to ensure you make the right decision for yourself.
The more you know, the easier it will be to eliminate your student debt and begin building a path toward financial freedom.
Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better.