In most cases, bankruptcy cannot discharge student loans. Usually the only viable way in which these loans can be discharged is because of the permanent disability or death of the borrower, neither a good option. Another method of discharging or challenging federal student loans is if the educational institute closes before the borrower graduates. This occurs more commonly in business and trade schools.
Prior to 1998, some people could avoid repaying their student loans by declaring bankruptcy. Tougher laws in 1998 in the US made it virtually impossible to prove financial hardship great enough to have these loans forgiven in this way. Even permanent disability of a spouse or child is only reason enough for deferment, but not loan forgiveness.
It is important, therefore, not to ignore your student loans and to do all that you can to borrow as little as is needed. When you do not maintain your payment schedule, the loans can go into what is called default. Once a loan is officially considered in default, your options for repayment shrink dramatically.
If you remain current on your loans and do not go into default, there are a variety of ways to defer paying them. First, attending school part-time, taking a minimum of six units per semester, can defer loan repayment. Financial hardship may also allow you to defer payments until a later time. Temporary disability can also help you get a deferment for up to three years. All these methods usually require extra paperwork proving school attendance or a medical condition, for example. The extra paperwork can be well worth it to avoid having loans in default status.
When a loan is in default, the company that owns the loan has several options. Large fees can be assessed to the loan, which make the ultimate repayment price much higher. Student loan companies can also garnish wages or take income tax refunds to pay back a portion of the money. This does not count as an actual willful payment made by the person, however, and the loan remains in default status.
The normal seven-year limit in which creditors can collect a debt does not apply to student loans, even private ones. In fact, in 2005, US law changes meant that even private student loans are exempt from bankruptcy proceedings. This means that, until a private or a federal student loan is repaid in full, a lender can continue to demand payment.
The fact that these loans cannot be discharged through bankruptcy should give students pause when borrowing money. You may want to consider attending a less expensive school to help reduce your education debt or search for scholarships. Working while attending school, though difficult, may also help how much you need to borrow, since the debt will continue to follow you until it is completely repaid.
