The Effect of Bankruptcy on Student Loans

One of the most common questions raised by graduates is whether bankruptcy on student loans really is possible. The short answer to this question is yes to some, but no to the overwhelming majority. Unlike student credit card debt, it is extremely difficult to eliminate student debt.

According to the National Post-secondary Student Aid study, the median level of student loan debt is $23,186. Clearly, it will be less for some and a lot more for others, but there is no doubt that the cost of securing a university education is escalating at an alarming rate.

Can Bankruptcy Discharge Student Loan Debt?

The effect of bankruptcy on student loans will be negligible for the majority of college graduates. However, filing chapter 13 bankruptcy could help an able bodied person to restructure their debts in order to improve affordability. It won't reduce or completely discharge student loan debt.

Effect of Bankruptcy on Student Loans - Long Term Illness Affecting Earnings

However, the situation may be different if a graduate is able to prove that they have a long term illness or injury that affects their earning potential. It will then be necessary to prove that making payments on student loan debt would bring about financial hardship.

Bankruptcy and Student Loans - Extreme Financial hardship

The impact of bankruptcy will be reduced for a minority who are able to prove severe financial hardship. A judge may be prepared to reduce the principal (amount owed), but won't completely clear student loan debt. This may help to reduce repayments slightly, but this won't help much if interest continues to accrue.

Ways to Pay Off Student Loan Debt

• Student loan debt forgiveness programs. College graduates who work in certain public sector positions (teaching, nursing and the armed forces) may be eligible for a student loan forgiveness. However, these programs will only help those who are struggling to keep-up with repayments on federal student loan debt and not private student loan debt from a financial institution.
• Student loan deferment. Graduates who are unable to make payments because of their employment status or financial hardship may be able to defer payment for up to 3 years. However, interest continues to accrue for the entire period.

The likely outcome of bankruptcy on student loans for the majority of graduates is that their debt will be restructured to aid affordability. Bankruptcy and student loans don't really work, except for those who have a long-term illness that seriously affects their earning potential.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.

Updated: 30 April 2011