The federal Department of Education has raised the possibility that students’ acceptance into a loan forgiveness program could be rescinded leaving them on the hook to pay back the loans. According to a report in The New York Times, more than 550,000 people have signed up for a federal program that promises to repay their remaining students loans after they work 10 years in a public service job. But now, those individuals are left wondering if the government will in fact hold up its end of the bargain or leave them saddled with thousands of dollars in debt, which they thought would be eliminated after a decade in public service.
Student Loans May Not Be Forgiven
In a legal filing submitted recently, the Education Department suggested that borrowers could not depend on the program’s administrator to accurately say whether they qualify for debt forgiveness. The agency said that thousands of approval letters that have been sent by the program’s administrator, FedLoan Servicing, are not binding and can be rescinded at any time.
As the first potential beneficiaries of the program reach the end of their 10-year commitment, the clocks will start ticking on the remainder of their student loan debts. So far, four borrowers and the American Bar Association have filed a lawsuit in a Washington federal court against the Education Department. The plaintiffs allege that they fulfilled their part of the contract only to be told later that there was no deal and no way to appeal. The lawsuit seeks to have their eligibility for the student loan forgiveness program reinstated.
This forgiveness program has offered significant incentives to borrowers to the point that they persuaded thousands to opt for public service jobs instead of taking on more lucrative employment in the private sector. The federal government approved the program in 2007 in a sweeping bipartisan bill. The idea that these approvals can be rescinded at any time with no explanation or no appeals process is frightening for borrowers, as it should be. The first wave of qualified workers will be eligible to submit applications for debt forgiveness in October.
Discharging Student Loans in a Bankruptcy
Getting rid of student loans in a bankruptcy could pose challenges, but it is possible. In order to successfully do so, you must be able to convince the bankruptcy court that repaying the student loans would cause you undue hardship. Bankruptcy is essentially a court procedure that gives filing parties the opportunity to either get their debts erased or to have them reduced. There are two different types of bankruptcy proceedings: Chapter 7 and Chapter 13.
Chapter 7 is the most common type of bankruptcy, where you may have to give up some of your possessions to pay off creditors, but may eventually be able to get your debts completely erased. The law states that student loans are an exception to the debts that could be discharged in a Arizona Chapter 7 bankruptcy. In order to get them discharged, you must file additional paperwork and meet a certain standard to demonstrate that you are facing an undue financial hardship.
When you file for Chapter 13 bankruptcy, you can keep all of you property, but you will still be required to partially or fully repay your debts. You may not be able to get rid of your student loans in a Chapter 13 bankruptcy, but you may be able to buy some time to repay them by getting on a payment plan.
How Do You Prove Undue Hardship?
There is no clear-cut definition for undue hardship under bankruptcy law. What this means is that courts could use a variety of tests to determine whether you qualify. These tests and factors may include the following:
Poverty or standard of living: If you are unable to make payments on your loans and maintain a minimal standard of living for yourself and your dependents, you may meet this standard. The court will likely base its decision on your current income and expenses. It might also take into consideration factors such as your income, education, skill sets, health, age and your potential to earn more income.
Persistence: In addition to proving that you are unable to make payments, you will also need to show that your condition is not short-term, but is likely to continue for the life of your loan. You may be able to prove this by showing, for example, that you have suffered a permanent injury or disability that limits your ability to earn a livelihood.
Good faith: You must also show that you have made a good faith attempt to repay your loans barring circumstances such as illnesses, injuries or a long-term lack of employment options. When you have one of those circumstances that prevent you from increasing your income or making payments on your loan, then, you may be able to get your student loans discharged.
Policy: Sometimes, courts will also look to see if you filed for bankruptcy for reasons other than getting rid of your student loans.
The first three factors listed here are part of what is known as the Brunner Test, which is used by many bankruptcy courts to decide whether or not your student loans could be discharged.
Steps You Can Take
There are a number of routes you can take if you would like your student loan forgiven. First, contact the career center at your school to research loan forgiveness programs. The career center is usually aware of opportunities that apply to particular courses of study offered at the school. Second, be sure to research all student loan forgiveness programs online. Start with a broad search, which includes all industries, and then narrow the criteria. Begin your research early. Jobs that offer loan forgiveness may include a lengthy application process.
If you believe that you have a legitimate circumstance to get your student loan discharged such as a permanent disability, you should contact the loan servicer directly. If you are considering filing bankruptcy, it is important that you seek the counsel of an experienced Arizona tax attorney, who can provide you with the guidance you need with regard to your specific situation.