Current and former students in the U.S. reportedly owe more than $1 trillion in public and private student loans. For many, the burden of student loan debt nearly eliminates any benefit of the education obtained with the loan proceeds. Making matters worse is the fact that federal bankruptcy law specifically excludes student loans from discharge. The U.S. Department of Education (DOE) recently announced two changes to student loan repayment rules, which apply to loans made through various DOE programs. The new rules do not affect a student loan debtor’s rights in bankruptcy in any way, but they may ease their debt burden in other ways.
Federal and state regulators have gone to great lengths to prevent financial marketing that could potentially mislead students. The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009, for example, largely prohibits credit card marketing on college campuses.
The first new rule announced by the DOE addresses prepaid debit cards and similar financial products. Numerous colleges have deals with banks that allow them to market prepaid cards to students as a convenient means of accessing student loan funds, sometimes without clearly disclosing overdraft and other transaction fees.. The DOE’s new rule requires schools to let students choose where to deposit their student loan funds, and it prohibits them from creating an impression that students must use a particular kind of account for their funds. 80 Fed. Reg. 67125 (Oct. 30, 2015).
Expanded Repayment Options
The Obama administration’s first action on student debt relief, known as the the Pay As You Earn (PAYE) program, was passed by Congress at the end of 2012. This program caps monthly student loan payments at 10 percent of a debtor’s available income. Its availability, however, is limited to loans that originated after October 1, 2007 through the William D. Ford Federal Direct Loan (Direct Loan) Program. Income-Based Repayment (IBR) plans, which cap monthly payments at 15 percent of discretionary income, are more generally available to student loan debtors.
In June 2014, the White House issued a Presidential Memorandum calling on the DOE to develop rules expanding the PAYE program. The DOE announced the Revised Pay As You Earn (REPAYE) program at the end of October 2015. 80 Fed. Reg. 67203 (Oct. 30, 2015). Under the REPAYE program, as many as five million additional Direct Loan debtors will be able to take advantage of the 10 percent cap on monthly payments. The new rules take effect in December 2015.
Student Loans in Bankruptcy
Unfortunately, student loans remain excepted from discharge in bankruptcy, unless a debtor can prove that continued payment would cause them “undue hardship.” 11 U.S.C. § 523(a)(8). Most jurisdictions, including California and the Ninth Circuit, have adopted a three-part test for establishing undue hardship, known as the Brunner test: (1) if required to repay the loans, the debtor could not maintain “a minimal standard of living”; (2) “additional circumstances” demonstrate that the current situation will “persist for a significant portion of the repayment period”; and (3) the debtor can show “good faith efforts to repay the loans.” Brunner v. New York State Higher Educ. Services, 831 F.2d 395, 396 (2d Cir. 1987).
If you need to speak to a Los Angeles bankruptcy attorney, contact the Law Offices of Devin Sawdayi today, online or at (310) 475-9399, to schedule a free and confidential consultation. We represent individuals and families in Chapter 7 and Chapter 13 bankruptcy cases, helping them repair and rebuild their finances with dignity and respect.
More Blog Posts:
Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015
White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, October 14, 2014
Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014