Law School Graduate Granted Discharge of Student Loans

The 9th Circuit recently affirmed a Bankruptcy Court judge’s decision to allow former law school student Michael Hedlund discharge $53,000 in student loans through bankruptcy.  Will this set a precedence on future bankruptcy filings?  Student loan default rates are rising at an accelerated rate.

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Former Law Student Discharges Student Loans Due to Asperger’s

A former law and phD student amassed nearly an incredible $340,000 before applying for Chapter 7 bankruptcy.  The Maryland bankruptcy court found that her condition rendered her impossible to pay back the loans.  Student loans are dischargeable only if “undue hardship” can be proven.  Undue hardship does not simply mean the loan cannot be repaid; rather the banks and courts have purposefully made it almost impossible to have student loans dischargeable.  The “Brunner Test” is applied and the elements that must be proven for undue hardship include: (1) debtor must show they can’t maintain a minimum standard of living if forced to repay; (2) debtor must prove that their ability to repay the loans will not improve; and (3) debtor must prove that they made a good faith effort to repay before filing for bankruptcy.

Student Loans are the Next Bubble

Student loans are NOT dischargeable is about 99.9% of cases.  You essentially have to prove extreme hardship, meaning that you’d have to meet a very high standard.  Simply not being able to afford to repay the loans is not enough.  Being homeless is usually not enough either.  The default rate of recent college graduates is approaching 25%, that’s 1 in 4 student loans being defaulted.  Home mortgage defaults are not even this high.  What makes it worse is that many student loans are co-signed by parents or grandparents who then must bear the brunt of repaying.  Also contributing to the crisis are older generational students burdened by student loans themselves.  There is currently legislation in the pipes to somewhat remedy the situation, however the prospects of it becoming actual law is uncertain.

20% of Recent College Graduates Unemployed

Employment news seems to be getting more grim.  20% of recent college graduates are now unemployed.  This will undoubtedly have generation-long repercussions.  Unless a real job creation mandate is set in place, America’s future workforce will fall even further behind their international counterparts.  Combined with non-dischargeable student loans, the default rates are surely to skyrocket and probably result in the next financial crisis (mortgage and tech bubble being the last two).

Student Loan Default close to 9%

Unsurprisingly, student loan defaults have increased by 25% to a rate of 9% overall.  Currently, student loans can NOT be discharged through bankruptcy unless the filer meets a ridiculous standard set in place by banks and the politicians they have pocketed.  The default rate will undoubtedly rise with the economy remaining stagnant and the massive influx of college graduates looking for work.  There has been a movement to have student loans dischargeable, which arguably would stimulate the economy more than any other plan proposed by Democrats or Republicans.  The online petition has gathered more than 270,000 signatures.  It definitely is about time to make student loans dischargeable, so it will be interesting to see if the politicians pay heed to their constituencies.