Trump signed a presidential memorandum on , ordering the federal government to expedite the discharge of federal student loan debt of permanently disabled military veterans. 37 While the federal student loan debt of veterans and other individuals who are permanently and totally disabled was already eligible for forgiveness under the Department of Education’s Total and Permanent Disability Discharge program, 38 the memorandum noted that the process was overly complicated and difficult, which prevented some eligible veterans from receiving discharges.
40 An exception exists if the individual is experiencing undue financial hardship. The most common test for undue hardship is the Brunner test, 41 which requires an individual to show that:
Unlike other consumer debt, such as mortgages and credit card debt, student loans ordinarily cannot be discharged in bankruptcy
- He or she cannot maintain, based on current income and expenses, a minimal standard of living for himself or herself and dependents if forced to pay off student loans;
- Additional circumstances exist indicating that this condition is likely to persist for a significant portion of the repayment period of the student loans; and
- The individual has made good-faith efforts to repay the loans.
In certain situations, ISAs can offer advantages over a traditional student loan
To meet the good – faith – efforts requirement, the borrower does not actually have to make payments, but merely attempt to make payments (i.e., make efforts to find a workable payment plan). One bankruptcy court in Pennsylvania has recommended the following approach to the undue hardship test: «Where a family earns a modest income and the family budget, which shows no unnecessary or frivolous expenditures, is still unbalanced, a hardship exists from which a debtor may be discharged of his student loan obligations.» 42
Filing for bankruptcy should be a last resort for student borrowers. Bankruptcy appears on the individual’s credit report and impacts the person’s ability to obtain a mortgage for a number of years. Bankruptcy is also an indicator of financial irresponsibility and can jeopardize the debtor’s professional licenses or job prospects. The courts tend to interpret the Brunner test strictly; qualifying for a hardship requires an extensive investigation of the individual’s facts and circumstances. As a result, it is very difficult to discharge student loan debt in bankruptcy.
The COVID – 19 Student Loan Relief Act of 2020 and the Student Borrower Bankruptcy Relief Act of 2019, which would eliminate or amend the section of the Bankruptcy Code that prevents student loans from being dischargeable, are before Congress. 43 To date, this legislation has not been enacted.
To help lower their student loan burden, individuals may wish to consider alternative approaches to paying for college or paying down student debt. Some of these alternatives include income – based repayment plans, Sec. 529 plan distributions to pay loans, state and local tax incentives, and retirement account hardship distributions, as discussed below.
There are various types of income – based repayment plans, including so – called income – share agreements (ISA) that a number of colleges offer. Under an ISA, a funder (public or private company) pays for a student’s college education in exchange for a set percentage of the individual’s future income for a certain number of years. 44 Students with low incomes pay less, and students with high incomes pay more. For example, students with ISAs will always have affordable payments since payments go up and down with income, reducing the likelihood that students will fall behind on their payments and suffer other credit problems. Many times, these payments do not start until the student obtains a job with a certain salary. But while low – income students often end up paying less with an ISA than with a traditional loan, high – income students often end up paying more, thereby offsetting the losses ISA funders have from funding students who do worse than expected.