Student Loan Debt: The Curse of Education in America

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If you run up $50,000 in credit card debt and find you cannot pay for it, you can eliminate that debt in bankruptcy. If you cannot afford your medical bills, you can eliminate that debt in bankruptcy. In certain situations, you can even eliminate debt owed to the IRS.

But, if you borrow money to get an education and cannot afford the minimum payments after several years of underemployment or unemployment, that’s another matter according to Congress.

The United States Bankruptcy Code states that debtors may discharge a student loan only if repaying the loan would impose an “undue hardship” upon them and their dependents. This applies to all student loans, regardless of whether the loans were obtained through government-sponsored lenders or private lenders. Most bankruptcy courts apply the “Brunner Test” and interpret “undue hardship” to mean an inability to repay the loan and maintain a minimal standard of living. However, your traditional notion of a minimal standard of living can differ greatly from what a bankruptcy judge may have in mind. Meeting this burdensome threshold also requires demonstration that the conditions imposing the hardship are unlikely to relent over time and that the debtor has made a good faith effort to repay the loans. Consequently, bankruptcy courts rarely determine that this test is met and a debtor’s student loans should be discharged.

Take the case of Mark Tetzlaff for example. Mr. Tetzlaff had amassed more than $260,000 in business and law school student loan debt. After graduating from law school he was unable to pass the bar after multiple attempts. His non-functional law degree did not lead to many opportunities and his criminal record made him look even less employable. At the time of his bankruptcy filing he was 57 years old, unemployed, and living with his elderly mother, who was supporting both of them on her social security checks. He argued that his alcoholism and psychiatric issues presented further obstacles for his ability to secure and maintain employment. The District Court and the U.S. Circuit Court of Appeals for the 7th Circuit affirmed the bankruptcy court’s ruling that repayment would not create an “undue hardship,” leaving Mr. Tetzlaff with $260,000 in student loan debt and no meaningful way to repay it.

This paints a bleak picture for our college graduates struggling with student loans, and I think it will only become more problematic in the years to come.

According to the Wall Street Journal, almost 71% of college seniors who graduated in 2016 carried an average of $37,172 in debt from student loans. Over the past 10 years, average debt at graduation has risen 56%, more than double the rate of inflation, according to The Project on Student Debt. In fact, student loan debt is growing at a rate of $2,726 per second, with the nationwide student loan debt now exceeding $1.3 trillion. In addition to the rising average student loan debt, the Great Recession has had a profound effect on our economy making it increasingly difficult for college graduates to obtain a high enough starting salary to pay back their student loans.

The Wall Street Journal estimates that more than 40% of Americans with student debt aren’t making payments or are at least 30 days behind on their payments. Will student loan debt be the next subprime crisis? There are many economists that believe the amount of federal money allocated to student loans is unsustainable. The question is now: When will the bubble burst?

If you are experiencing financial hardship due to your student loans, speak to an experienced bankruptcy attorney and discover your options. If you don’t meet the “undue hardship” test, bankruptcy could still be useful by eliminating other debt and allowing you to redirect disposable income to those pesky student loans.

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Brooke S. Barden, Esq.

Brooke S. Barden, Esq.

Mrs. Barden focuses her practice on individual consumer and business bankruptcies, tax preparation and compliance, tax litigation, corporate and business law, estate planning and administration and general civil litigation. Mrs. Barden is admitted to practice in the United States Bankruptcy Courts for the Eastern and Western Districts of Virginia, the United States District Court for the Eastern District of Virginia, the United States Tax Court and in all courts in the Commonwealth of Virginia. She received her B.S. from Virginia Commonwealth University in 2002 and her Juris Doctor degree from Regent University, School of Law in 2006, where she graduated in the top 15% of her class. She is a member of the Virginia State Bar Association, Bankruptcy Law section member, and the Chesterfield Bar Association. Mrs. Barden is based in our Richmond office, but she also works out of our Newport News office.

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