Change to Income-Driven Student Loan Repayment Plans Could Lead to Increase in Bankruptcies

Student loan debt has been one of the main drivers of personal bankruptcies for decades. One reason for this is the federal law that prohibits the discharge of these obligations in Chapter 7 bankruptcy unless the filer can show that repayment would pose an undue hardship on them. Various programs have been developed to address the financial burden stemming from tuition costs and related expenses. However, one effort initiated a few years ago has now been halted, which could push more individuals toward bankruptcy as loan repayment costs rise. 

The U.S. Department of Education has announced an agreement to end the Saving on a Valuable Education (SAVE) Plan after prolonged litigation and court injunctions regarding its legality. Under SAVE, repayment terms were tied to an enrollee’s income and loan forgiveness was accelerated. Pursuant to the settlement, new borrowers can no longer enroll in SAVE, pending applications will be denied, and the government will transition existing participants into other repayment plans that could be more expensive than SAVE.

While some other income-driven plans still exist, their terms are generally not as favorable to borrowers in terms of payment amounts or the time it takes to retire a loan. Increased obligations could strain personal budgets to the point where Chapter 7 bankruptcy becomes the best option. Even if student loan debts are not discharged, many people owe payments to multiple creditors. Clearing out credit-card balances and past due medical expenses might give someone the ability to adjust to their new education debt terms. 

There has also been discussion that due to guidance from the U.S. Departments of Education and Justice, courts over the past few years have been more willing to find that undue hardship exists in student loan debt cases. A qualified bankruptcy attorney can look at your situation and assess whether a debt discharge might be possible under Chapter 7. Another option could be a Chapter 13 repayment plan that stops creditor calls and incorporates loan repayments into a reasonable framework based on your income and living expenses.  

Jeff Field & Associates advises Georgians on a full range of bankruptcy matters, including relief for individuals struggling with student loan debt. Please call 404-381-1278 or contact us online to schedule a consultation. Our offices are in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur.