The Student Loan Crisis
Many would say that calling the current student loan situation in the United States a crisis is an understatement. In 2019, the total of outstanding student loans is approaching $1 trillion. To put that number in some perspective, it’s near twice the current mount of U.S. military spending.
The average debt of a newly minted graduate of a four-year private university is about $36,000. No wonder there are so many “boomerang” college graduates who are unable to find adequate employment and are forced to move back to their parents’ home.
A significant portion of the staggering amount of education debt is comprised of loans made under the federal Family Education Loan Program (commonly known as parent PLUS loans). These are loans made directly to parents of dependent undergraduate students.
If you’re one of these debt-burdened graduates or parents, you may be considering bankruptcy.
We have written extensively about bankruptcy and student loans crisis in the United States.
Despite some recent encouraging efforts, obtaining a discharge of student loan debt in bankruptcy remains a challenging task. It requires a showing of hardship, which is difficult for most students to prove. Not only that, but defaulting on a student loan can prevent you or your child from obtaining additional loans for graduate or professional school.
Forgiveness Instead of Discharge
What is the possibility of forgiveness by the lender as an alternative to bankruptcy?
The Obama Student Loan Forgiveness Program (also known as the “Pay As You Earn” or “PAYE” Program) expanded the ability of students to earn forgiveness of a portion of their debt. PAYE requires you to make some payments, consistent with your employment income. If your school has closed you may also have your loans canceled. However, this is mostly confined to schools whose actions in recruiting students were considered unfair or deceptive, not traditional four-year colleges.
We need to get a little morbid here. Perhaps not surprisingly, both student borrowers’ and PLUS parent debtors’ education loans generally are forgiven in the event of the student’s or parent’s death. These loans typically are also canceled if the parent becomes totally and permanently disabled.
Forgiveness of debt generally results in federal income tax liability for the amount of that debt. However, recent changes to the law have eliminated the federal income tax liability that would otherwise have resulted from forgiveness of student loans.
Federal Legislation Is Needed
Despite this positive change, parents’ liability for PLUS loans still cannot be forgiven if the student becomes disabled. Though they may well be bearing some or all of the cost of caring for their disabled son or daughter, as noted above parents with PLUS loans may only qualify for forgiveness based on their own disability. Moreover, if both parents have PLUS loans and one becomes disabled, the other must still repay the loan.
Legislation that would have remedied this seeming disparity, the “PLUS Loan Disability Forgiveness Act” was introduced in 2017 in the 115the Congress, but was not adopted. The “Parent PLUS Loan Improvement Act of 2019” was recently introduced and referred to the House Committee on Education and Labor. While it would reduce interest rates on parent PLUS loans and allow parents to participate in certain income-based repayment programs, it does not provide for forgiveness of parent PLUS loans if the parent’s child becomes disabled.
Whether the pending legislation will be amended to include this provision remains to be seen.
Consult an Experienced Lawyer
Despite the “hardship” hurdle, if loan forgiveness isn’t available to you you may still find an alternative in bankruptcy. Give us a call today to review your options. You can also schedule a consultation by clicking here.