Bankruptcy may offer relief from overwhelming student loan debt

 Posted on June 30, 2023 in Student Loan Debt

Since 2020, at least 40 million federal student loan borrowers had their monthly payments paused. As reported by the Associated Press, with payments now set to resume, the U.S. Department of Education anticipates a historic number of borrowers not having the means to meet their due dates.

Higher living expenses combined with the inflation increase could result in many borrowers defaulting. Students who graduated during the pandemic may have found jobs with starting salaries that covered their expenses. Their current budgets, however, may not have the ability to "stretch" enough to include loan payments.

A student loan default may lead to aggressive collection efforts

According to data from the U.S. Federal Reserve, borrowers carry a total of about $2 trillion worth of outstanding student loans. Missed payments on student loans may also add up and possibly lead to default.

According to the Federal Student Aid website, after a student loan default, aggressive collectors may demand immediate payment for the entire balance of the loan plus interest. New bankruptcy guidelines established in 2022, however, may provide relief from an overwhelming student loan burden.

Borrowers may need to pass the undue hardship test

Severe financial circumstances may permit a bankruptcy filing if borrowers pass the undue hardship test. Guidelines from government officials also provide bankruptcy judges the discretion to decide whether to discharge student loans. Some of the issues that borrowers must show include their current and future ability to repay their loans.

In the months following the end of the pandemic's student loan pause, many borrowers could find themselves lacking the ability to repay their loans. Certain financial circumstances may, however, allow borrowers to include their student loan debts in their bankruptcy petitions.