First, here are a few facts to consider about student loan debt. In February, Forbes reported that the total outstanding student loan balance in the United States had reached $1.08 trillion and 11.5 percent of that was at least 90 days delinquent or in default. That 11.5 percent delinquency rate was the highest among all forms of consumer debt and it has risen consistently since 2003.
Also, the average amount of debt carried by consumers has grown, too. Forbes reported the size of the average student loan in 2005 was $17,233 but that number had grown to $27,253 in 2012 – a 58 percent jump in seven years.
Student loans can be problematic, to say the least. Both private and government-backed student loans are difficult to discharge in bankruptcy. To make matters worse, some people who default on government-backed student loans can lose their professional licenses.
The conventional wisdom, then, has been pretty clear – you can’t get rid of your student loans, so pay them back or bad things will happen to you.
Regardless, a 2011 paper by Harvard Law School alum Jason Iuliano titled An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard makes the bold assertion that a lot of people could discharge student loan debt in bankruptcy court but don’t even try.
Granted, it is no walk in the park to discharge student loan debt. A debtor that tries to do that must prove that paying back that debt would impose an undue hardship on them. The debtor must also file an adversarial proceeding against the student loan agencies at issue and prove up the hardship claim in a hearing separate from the overall bankruptcy case.
Iuliano’s research found that 69,000 people who filed for bankruptcy in 2007 would have had a good shot at getting their student loans at least partially discharged, but only 300 people actually sought such a discharge.
If Iuliano is right, that is a staggering fact. Still, it is important to keep it in perspective. Out of all the people carrying student loans that file for bankruptcy every year, 69,000 is an incredibly small number.
But Iuliano’s research is compelling in that it may put a dent in the conventional logic that suggests student loans are impossible to discharge. A person who is drowning in student loan debt and filing for bankruptcy might want to take the time to ask his attorney about what the undue hardship is and whether it might help someone get out from under that debt.
This column was authored by Ethan C. Nobles and originally appeared in the Sept. 9, 2014, edition of the Daily Record in Little Rock.