Alternatives for private student loans are more limited than those available for federal student loans. Private student loans are not eligible for any government based student loan assistance or forgiveness programs. Options to address private student loans include negotiation of lump sum settlements or monthly payment plans, defending a collection lawsuit, and bankruptcy (undue hardship in chapter 7 if you qualify, and/or discharging the loan if it is a “non-qualified” student loan; or, stopping the lawsuit and making payments in chapter 13).
Often times the private student loan is easier to resolve after the creditor brings a lawsuit because the consumer now has access to all of their legal rights under the law. It also means the creditor (the lender that issued the private loan, or another company that acquired the loan) has the burden of proving the debt. In many cases this is difficult for the creditor to do. The potential defenses in the private student loan lawsuits include:
- The statute of limitations has expired.
- The creditor cannot prove they own the loan or how they acquired it.
- The creditor cannot provide evidence to support the balance sought in the lawsuit.
- The creditor has improper paperwork.
- The creditor cannot get their documents in evidence because they do not have a competent witness to testify.
Discharging private student loans in a bankruptcy through an adversary proceeding is possible if you qualify for an “undue hardship” or have private student loans that are “non-qualified”.
The test for “undue hardship” used by Minnesota bankruptcy courts is called the “totality of the circumstances” test. Three factors are evaluated to determine undue hardship under this test: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.
In 2005, Congress amended section 523(a)(8) of the Bankruptcy Code to except from discharge private student loans that are “qualified education loans.” Qualified education loans are defined in both the Tax Code and the Higher Education Act as debts incurred solely to pay for (i) qualified higher education expenses (ii) at an accredited institution by (iii) an eligible student. Qualified higher education expenses are defined as the “cost of attendance” which is a sum determined by the institution, to cover tuition, fees, room, board, and books.
This is not only a question of bankruptcy law, it is foremost a question of tax law, because the interest paid on a qualified education loan can be deducted from the taxpayer’s income tax. And you can be sure that the IRS will not allow taxpayers to bend the rules to deduct interest paid on educational loans that do not meet these strict requirements. So, how do we prove that your loan is not a qualified education loan?
- Ineligible Schools: We check your school against the Department of Education’s Title IV eligible school list for the year in which you attended. If the school does not appear, the school was not Title IV eligible, and the loan could not be a qualified education loan.
- Ineligible Money: We check your “cost of attendance” and compare that to the total of amount of money you received from all federal, state, and private sources, including scholarships, grants, work-study, and loans. If you borrowed even one dollar more than was necessary to cover the “cost of attendance,” the private loan was not incurred solely to pay for qualified higher education expenses and is not a qualified education loan.
- Ineligible Students: We check to be sure you met all the requirements to be an eligible student under the Higher Education Act. Were you registered for selective service? Were you a high school graduate? Had you exceeded your annual or aggregate Stafford borrowing limits? All of these elements are necessary to retain eligibility under the Higher Education Act, and where a student was not eligible, no money lent to that student could be qualified.
To see if bankruptcy is a possible option to discharge your private student loans, you will want to consult with experienced counsel to explore this option further. We are having success right now in cases with private loans and “undue hardship” where no reasonable repayment options exist and also in cases where the private loan does not meet the “qualified educational loan” requirement. We recently made new law in Minnesota with respect to “non-qualified” private student loans. See Schultz vs. Navient Solutions, Inc., 2016 WL 8808073 (Bankr. Minn. 2016).
With over 35 years’ legal experience working with consumers to solve their financial problems, I am confident I can help you with your student loan debt. My goal is to prepare a comprehensive plan to resolve your student loan issues so you can live a better life.