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Student Loans and Bankruptcy

With student borrowing on the rise, heavy debt loads are a growing concern among young Americans. According to the U.S. Education Department, federal student-loan disbursements - the total amount borrowed by students and received by schools - grew to $75.1 billion in the 2008-09 academic year, a 25 percent increase over the previous year. Approximately two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate.

The new numbers have wide-ranging implications for a generation of young people. With a struggling economy and unemployment at record highs, students entering today's job market are already facing extremely challenging employment conditions. Younger workers have been disproportionately hurt by the weak labor market, and are often the first wave of employees to be laid off. Add the growing student debt to the mix and you have a generation struggling to stay afloat.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it is no longer legally possible to write-off private or federal college student debt. The only exception to this over-riding rule is where the borrower can prove that repayment imposes an "undue hardship” on his or her situation. This usually occurs when an individual faces indefinite unemployment due to a permanent physical disablement. Getting a student loan discharged under "undue hardship” is extremely rare.

Individuals seeking a discharge of their student loans this exception must file a separate motion with the bankruptcy court and then appear before the judge to explain their situation. Due to the courts' reluctance to discharge student loans, individuals who are struggling to make their student loan payments ought to consider all of their options, such as requesting loan deferral or an extended-payment option, before turning to bankruptcy.