Is Student Loan Bankruptcy Possible? What is the Effect of Bankruptcy on Student Loans?

A National Post-secondary Student Aid study revealed that college student loan debt currently stands at an average of $23,186. Clearly, this figure is a lot higher for many students. This has led a number of graduates to look into the possibility of student loan bankruptcy, debt forgiveness programs and a host of other ways of reducing the overall financial burden.

The Effect of Bankruptcy on Student Loans

The introduction of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has meant that it is no longer legally possible to write-off private or federal college student debt. However, those with an overwhelming debt burden may be able to reduce this figure through the courts. It is more likely that a court will re-schedule repayments in a chapter 13 bankruptcy debt repayment plan.

Student Loans and Bankruptcy – College Student Loan Debt can be Eliminated

The only exception to this over-riding rule is where the borrower can prove that they are unable to work indefinitely due to a permanent physical disablement. It is necessary to prove that earning potential is badly affected and that making payment will bring undue financial hardship on a family. Sadly, this will only apply to a very small number of individuals.

Avoid Paying Off Student Loans – Debt Forgiveness Programs

Those who work in certain public sector positions, such as teaching, nursing and the armed forces may be able to benefit from a debt forgiveness program. These will eliminate a set percentage of federal student loan debt in return for each year of public service. It is important to note that many programs have experienced cutbacks since the economic downturn. They are not applicable to private bank loans.

Paying Off Student Loans Later – Student Loan Deferment

Provided that a college student loan hasn’t been defaulted on, the borrower could defer student loan payments. The maximum period of deferment for unemployment or financial hardship is currently capped at three years. However, deferring student loan payments won’t prevent the accrual of interest. The exception to this rule are Perkins loans and the means tested Stafford loan.

Student loan bankruptcy will only write-off college student debt for a small number of individuals. It will be necessary to demonstrate that a disability will affect that person’s long-term earning potential and create serious financial hardship. The effect of bankruptcy on student loans can still be a positive one as it is possible to affordably restructure debt repayments. There are also a number of ways to help pay off student loans which are well worth considering.