An alarming number of students are graduating from college with incredible amounts of student loan debt and leaping right into a low-paying job. Can you say recipe for financial disaster? Let’s take an example of a master’s level student who took out $150,000 in loans and now earns $30,000 a year without the prospect that his income is going to rise significantly any time soon. That annual salary works out to about $2,500 per month. Payments on $150,000 could be as high as $1,500 monthly. That leaves you with $1,000 a month left for total living expenses! That’s not enough to cover rent in some areas.
You might think bankruptcy is the way out from under this crushing financial debt. Sorry to be the bearer of sad tidings but student loans are not, as a matter of course, able to be automatically discharged through bankruptcy. You first must prove “undue hardship,” which is not an easy matter. Generally it means you or your spouse must have a mental or physical condition that prevents you from working and earning at a high enough level to ever pay back the amount you borrowed. Claiming you simply can’t afford the payments is not good enough.
The courts take the whole idea of personal responsibility quite seriously when it comes to student loan repayment. The “undue hardship” test is three prong in nature and was mostly established by the precedence of a 1987 case known s Brunner vs. New York State Higher Education Services Corp. It goes like this.
1. That the debtor cannot maintain a minimal standard of living, based on current income and expenses, if forced to repay the loans.
2. That additional circumstances indicate that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
3. That the debtor has made good faith efforts to repay the loans.
While many graduates with stratospheric levels of student loan debt might meet the first part of the test, it’s the second prong about “additional circumstances” that weed out the vast majority of claimants. This is where you must prove a physical or mental condition, basically a disability, to qualify for the “undue hardship” out.
This leaves student loans as a debt rarely discharged by bankruptcy. If that is the primary reason you’re considering the process, ponder the reality before you do.
The Young Wealth Team
Flickr / Wallula Junction