Struggling to pay back college debt? Is bankruptcy an option? Via Shutterstock
Here’s a typical scenario for my boyfriend, who has a ton of student debt:
It’s Friday night and he just got paid. Time to go to the bar and celebrate the end of a hard working week, right? Wrong. Between loans, rent, and food for the week, he’ll be barely making it until his next paycheck. Our friends don’t understand why he can never afford to go out or his desire to pay back all of his loans as fast as possible.
“Just stop paying so much,” they say. “Quit putting your whole paycheck towards your loans.”
“The interest!” he wants to scream at them. Instead, he goes home and thinks about how great it would be to not have to worry about being in debt for the rest of his life (or at least the next 10-15 years). He can’t help but think, is there any way I can get out of paying these loans? Can bankruptcy make all my college debt go away?
Is bankruptcy better than debt?
Many graduates are panicking about their college debt and questioning whether the investment they made was worth the cost. Bankruptcy, while at first seems like a good option, may not get rid of student loan debt.
In order to discharge student loan debt in bankruptcy, you must prove that paying back the loans, “will impose an undue hardship on you and your dependents.” This is more than the loans forcing you to skip fun activities or even prevent you from living in the area you want to live. This is about poverty.
According to the Student Loans Borrowers Assistance Bankruptcy, “the most common test to prove undue hardship is the Brunner test which requires showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans.”
This means that if you can afford to make the payments without actually becoming homeless or destitute, then bankruptcy won’t help you get out of paying back your college debt.
Student loan debt is constantly referred to as “good debt.”
This means that your education is an investment that will grow and lead to a larger income. Student loans are how you afford a college education, which most would agree means access to a better job and eventually, higher income.
The key word is eventually. Entry level positions for many post- college careers such as design, marketing, and even some finance positions have starting salaries of around $30,000. That’s $10,000 less than many students paid per year for college.
The main problem is that college debt piles up very quickly. At school costs ranging from $10,000 – $40,000 per year the amount of debt (and the added interest) can end up being substantially more than what students make after college.
While I’m not saying post grads are victims, they may not have been aware of the true weight of their choice of college and what this debt entails. At 18, college freshman aren’t allowed to drink and this is the first year they can have their own credit card. These credit cards usually have very low limits, between $500-$1,500, and very high interest rates, ranging from 14-20 percent. The limits are so low and rates are so high because for many students this is their first experience with credit. They can however, decide to take on tens of thousands in debt. Is this really a decision they are ready to make?
Welcome to Bargain Babe! I’m Mara, and I’m so glad you’re here. I am an obsessive bargain hunter and penny pincher, and I am determined to live a full life without EVER paying full price.
Before signing for loans, ALL students should check with a financial advisor– could be your own parents, friend’s parent or even talking to someone at the FREE counseling center or an Accounting professor at your college! Apply for hundreds of grants and scholarships, cut down to bare bones ( yes that means no cable, use library Internet, cook low cost healthy meals, no iPhone) and find jobs on campus. From a moral standpoint, all debt should be paid back. Take courses at community college, consider state colleges vs private schools and you can graduate debt free. You may need to rent a room and share, take a bus or bike vs have a car, barter services like haircuts……..a good wake up is going online and seeing how $2000 invested at age 18 grows to a huge retirement vs not investing in IRAs til age 35…… And, of course, some of us worked babysitting at age 13, had “real” jobs at 16 and worked thru college……I have a BA degree and 3 MA degrees and graduated debt free so I do know what it takes! Too many today feel entitled and do not want to take responsibility for their own decisions………if your parents do not provide guidance or assistance, then seek it out at a school counseling center,mask a pastor to out you in touch with someone retired who would love to mentor you about budgeting, seek guidance from high school counselors and teachers……..
@Janet That is great advice. I really wish that your message was more prevalent on high school campuses. Many of my friends, my boyfriend included, are realizing this too late. I worked through college and also chose a state school that allowed me to graduate debt free. I think it would be wonderful if all students were required to meet with a financial advisor. This way, they would be educated and would understand the true weight of their decision.
Janet hit the nail in the head and she does have the experience of dealing with these issues properly. I think people shouldn’t borrow money this easily, should really asses their financial possibilities (maybe choose a less ‘fancy’ school, so that they could really afford tuition), work during college (as much as possible) and party less.
I paid for my college from my salary, worked FULL TIME and had absolutely zero debt. I wasn’t a party animal, I had a boyfriend and a social life that didn’t involve me spending cash like there’s no tomorrow. Not to mention that the time I spent not studying or working, was spent learning how to design web sites, which in few years turned into a side-gig and now it’s my business.
As for applying for bankruptcy: I’m a firm believer in being responsible for your deeds and paying your dues. I was in debt for 4 years and paid it off completely. Not easy, but at least I learned my lesson.
@dojo Wow! That’s definitely impressive that you worked full-time throughout college. Were you also taking classes full-time? I worked part-time in college and was on the school gymnastics team. Each required 20 hours of work a week, so I look at it as being the same as having a full-time job. My boyfriend didn’t work during college (except for summers) because he devoted almost all of his time studying. As a computer engineering major his classes required labs and more studying than most majors. I have found that many of my friends who studied engineering or various medical fields didn’t work during college. Do you think that there are some majors that would make it harder to have time to work?
Your boyfriend is right is wanting to reduce the amount of interest that he is paying on his student loans by upping his monthly payment but he can still scale back his payments to the minimum occasionally if extra cash is needed. Student loan interest payments reduce the adjusted gross income on your tax return which may lower your tax rate.
Most student loan debt CANNOT be discharged in bankruptcy. Any cancellation of debt (i.e. credit card debt) MAY be subject to income tax based on the persons solvency.
There are some programs where student loan debt would be reduced or forgiven if the person works in certain underserved areas for specified amounts of time. These would have to be investigated.
I wish your boyfriend luck in his chosen career.
@Myke I’ve just begun to really understand how quickly interest accumulates! I didn’t realize that paying an extra $100 or $200 on a loan could reduce the interest you pay by thousands. That’s interesting about loan interest payments lowering your tax rates. Thanks for the information, I’ll be looking into it!
In the article, I was struck by the difference between need versus want. While I was lucky enough to get through college without much debt, my husband (at that time, boyfriend) was not. But he took the steady government job out of college (which had good health benefits and a nice retirement benny at the time) rather than taking the “fun” jobs that a lot of his friends had; he bought the cheapest car that he could (no AC….) ; he lived in an apartment above a restaurant that was a LOT less nice than his college dorm (again, no AC); we never went out drinking — our entertainment was the free/extremely low cost activities on campus (he still lived close to the university); we ate what I cooked every night (he did pay for his share of the groceries), etc. Basically, we lived a very frugal lifestyle — but we still had fun. He paid off his debts in half of the time that was required.
This shock to our system had done us a world of good in our lives. We are able to have a large family on one income, and, although we sometimes struggle (the government furlough was incredibly stressful), we know what is really valuable and necessary. Our kids certainly know the value of the dollar — they went to NYC to see the Rockettes yesterday (SUPER discounted tickets, YEAH!) and went into the Lego store. They were starting to annoy the staffer near them with their conversation — “Dad, this is such a rip-off. I know that the on-line price is $20 less…. Look, Dad, this one is $25 more than the catalog…..”
@Sarah I actually laughed out loud when I read that about your kids! When I was younger I was like that too. I’ve always been very frugal, especially once I began to have money of my own. It’s amazing that your husband was able to pay back his debt in half the time. I think part of the problem is how daunting it seems to have so much debt! Maybe the best solution would be to just keep cutting back and saving money instead of focusing on the “scariness” of the debt. Thanks for the tips and for making the future seem a little brighter!
It’s very disturbing that this is even a question. What has become of our society that it is acceptable to renege on contractual obligations because it turns out you made a bad decision – a college major with poor job prospects, a house you couldn’t afford, running up credit cards because you have them, etc? At 18 one is an adult whether they act like it or not. If an 18 year is not expected to be responsible for for their financial decisions then I certainly don’t want them voting and affecting the direction of our country. If this was my boyfriend, I’d run away as fast as I could.
@Kathy My boyfriend is not shying away from the responsibility of his loans. He’s paying $2,000 every month, which is a little less than 2/3 of his monthly salary! I think the idea of declaring bankruptcy is more reminiscent of dreaming about being out of debt than viewed as an actual possibility by many college grads. I agree with your point that 18 year olds can vote so should be held responsible. Maybe the difference is that students are taught what they should know before voting. They are told in history class to read about candidates and develop their opinions. They are encouraged to learn and taught how make an informed decision. Unlike with voting, students aren’t given much guidance on what college to choose. Do you like the program? Do you like the area? How about the campus? These are common questions students ask themselves when choosing a college. Instead of considering what is really important, is this a good investment? This should be the most important question, but it’s not even thought of by many college students. When I graduated high school I felt I HAD to go to college even though I had no idea what career I wanted to pursue. I went to college and began as an undecided major. I didn’t have to take out loans, but if I’d had to, I wouldn’t have had any idea what I was getting into. Maybe providing more education about how to determine what college is right for you would lead to less debt!
Yes, student loans are often left out of bankruptcy. I worked as a bankruptcy advisor for 5 years and every client that had a student loan had no idea it wasn’t regarded in the same way as other loans.
Despite that, in your boyfriend’s case it sounds like he would benefit by introducing some moderation into his debt management. it’s great that he’s trying to pay it all off as soon as possible, but at the expense of not even affording a night out? This will ultimately leave him more stressed out than someone paying the minimum.
In addition, I know it may sound bad, “being in debt for the rest of your life”, but if it’s debt you can manage and control, it’s really a non-issue. Even many of the richest people have debts, and it’s not a problem for them because they know how to leverage it.
The point I’m trying to make is, if you boyfriend relaxed a little on the issue of trying to clear all his debts (at the expense of living and enjoying his leisure time), he would likely be feeling much better about the situation. After all, it’s only debt – and how it effects you is mostly a matter of your own perception.
I’ll give you an example: I was once speaking to a client that was considering bankruptcy. He owed around £50,000 and had already attempted to kill himself. He was on such heavy anti-depressant medication that his reaction time was slowed down to about 6 seconds – so you can imagine it was a long and drawn out conversation. In his case, the vast amount of pressure that he felt because of his debt was self imposed! Sure, he received phone calls and letters from creditors, but it was feelings of guilt and shame that he perpetuated himself that pushed him over the edge.
On the other side of that I’ve had clients owing up to 1 million that are completely nonchalant and indifferent about it. That’s because they know nothing really bad can happen to them because of it and they choose not to let it stress them out.