Imagine being 45-years-old, disabled and unemployed, and seeking to have a $37,000 student loan account discharged in bankruptcy court because paying the monthly payments, you believe, would cause an a major financial burden? Imagine, as Bloomberg Business reported in the case of Monica Stitt, the bankruptcy court rules against your claim and says you must repay the student loan despite being disabled and unemployed.
Stitt, who has been unemployed since 2008, has a total over about $10,000 income annually, which includes Social Security disability and other public assistance. After initially borrowing $13,250 in student loans, Stitt owed a total of $37,400 on student loans, with interest compounded, when she filed for personal bankruptcy. The judge ruled she had not made a “good-faith” effort to repay the loans, and therefore was not eligible to have the student loan account discharged in bankruptcy court.
U.S. District Judge Peter J. Messitte of the Bankruptcy Court in Maryland ruled that Stitt did not qualify under the “undue hardship” test under the U.S. Bankruptcy Law to discharge student loan debt. The three part test requires that one can not maintain a “minimal standard of living” if forced to pay back the loan, and that one’s current circumstances will last indefinitely into the future, and that one has made “good-faith efforts” to pay back the loans.
Messitte ruled that Stitt failed to conform to the last of the three tests, in that she had some money that could have been paid toward the loans and failed to do that. Stitt said she used that money to pay down other debts instead. Judge Messitte also noted that Stitt was eligible for two loan consolidation programs that would have lowered her payment to nothing per month based on her income level, and would have placed her on a payment plan for 25 years at that level if her income did not increase. After those 25 years of payments, the loans would be considered paid in full by forgiving the remaining balance on the loans.
This case illustrates how tough it is to get student loans discharged in bankruptcy court, Consumerist reports. While is seems true in cases like this, that the “undue hardship” provision of bankruptcy law is a tough test to meet in a bankruptcy case, it should be remembered, as Judge Messitte found in his research, student loan borrowers have a variety of loan consolidation options and repayment plans designed to meet their needs, even when unemployment and other circumstances finds them getting by on minimal levels of income.
“Stitt’s disability status does not affect her eligibility for income-sensitive repayment plans or loan consolidation,” court papers read.
The judge made it clear that participating in such a program that includes an income-sensitive repayment plan, that could lower her monthly payments as low as zero per month, was the alternative to discharging of the loans that Stitt should be seeking.
Student loans nationally make up about $1.2 trillion of collective debt, and the average student will graduate more than $26,000 in debt on student loans, the Inquisitr reported. That is the average for students graduating with undergraduate degree. Medical students, for instance can on average graduate with more than $200,000 in student loan debt. Essentially, student loan debt can be so large, it’s like having a mortgage on a home without owning the home to show for it.
Are student loans growing too high, and what is the solution to student taking out all this debt to go to college? What should be done about the rapid rise in student loans?
[Photo of student loan protesters by David McNew for Getty Images.]