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Once considered “good debt”, in the same category as mortgages, student loans are increasingly becoming a serious problem.
Last year, student loan debt surpassed credit card debt and is expected to soon increase beyond 1 trillion dollars. This debt increase is more astounding when considering that in the year 2000, student loan debt was less than $200 billion. The effects of insurmountable student loan debt, compounded by the lack of available jobs or low salaries, have tremendous implications for the current generation of students and graduates.
In 2009, the Obama administration introduced a program that limits the monthly payment for eligible federal student loan borrowers to fifteen percent of their discretionary income, and forgives the debt after 25 years. In October of 2011, the Obama administration introduced a new program to further help alleviate the burden of federal loans. This program would limit the student loan payment of eligible participants to ten percent of their discretionary income and will forgive the debt after 20 years of repayment. These initiatives would only help the eligible participants and will do nothing to ease the private student loan burden.
A good number of student loan debtors will not receive adequate relief from their student loan debt unless they can discharge at least a portion of it in bankruptcy.
Unlike credit card debts, and undersecured mortgages, student loans are not dischargeable in bankruptcy, pursuant to section 11 U.S.C. § 523(a)(8) of the U.S. Bankruptcy Code. Before the 2005 amendments to the Bankruptcy laws, only government issued or guaranteed student loans were non-dischargeable. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) made all students loans, federal and private, non-dischargeable, unless the debtor can demonstrate undue hardship. This past summer, the Fairness for Struggling Students Act of 2011 was introduced in the U.S. Senate, and the Private Student Loan Bankruptcy Fairness Act of 2011 was introduced in the U.S. House of Representatives. Both bills seek to make private student loans dischargeable again. No major action has been taken on either bill since their introduction early this past summer.
For their part, Florida courts continue their move towards more liberal treatment of student loans. In re Abaunza, 452 B.R. 866 (Bankr. S.D. Fla. 2011), the U.S. Bankruptcy Court for the Southern District of Florida recently held that an above-median income debtor who commits all of his projected disposable income to pay his unsecured creditors in his Chapter 13 Plan, may use excess discretionary income to pay their student loans. In this case the Court noted that the debtors were able to pay the student loan debt under a separate classification because the debtor’s actual expenses were less than their expenses as calculated under the means test for the purpose of obtaining the debtor’s projected disposable income. As a result, the debtors ended up with an excess discretionary income that they decided to use to pay their non-dischargeable student loans. The court overruled the trustee’s objection holding that the separate classification did not constitute unfair discrimination and expressing that what the debtors do with their discretionary income is the debtors’ prerogative.
Although student loans are currently near impossible to discharge in bankruptcy, there is some hope that the government make carve out some relief for the nation’s young professionals.
—Craig I. Kelley, Esquire of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. His office is located in West Palm Beach and he can be reached at 561-491-1200 or at firstname.lastname@example.org. Log on to http://www.kelleylawoffice.com for more information.