Student-Loan Consolidation: A Possible Alternative to Bankruptcy

With many Americans underemployed or unemployed, the poor economy is affecting people's ability to repay their student loans. Because of the difficulty and downside of discharging student-loan debt in bankruptcy, people overwhelmed by student loans should first consider loan consolidation.

Student-Loan Consolidation

Through loan consolidation, individuals can combine several existing education loans into one Direct Consolidation Loan and make single payments to the federal government. Federal student-loan consolidation is free with no minimum debt amount required. The interest on a Direct Consolidation Loan is a weighted average of the existing loans' interest rates, but it cannot exceed 8.25 percent.

Depending on the terms of the consolidated loan, individuals may have longer repayment periods, possibly lowering the amount due in monthly payments. In addition, with federal loan consolidation, individuals may defer payment for up to three years. But, any grace periods for the original loans are forfeited when the loans are consolidated.

Student Loans and Bankruptcy

While possible, student-loan debt is difficult to discharge through bankruptcy. This is because an individual must demonstrate that repaying the debt imposes an "undue hardship" on him or herself, and his or her dependents, before the student-loan debt will be eliminated in a bankruptcy.

Different judges use different measures to decide whether repaying student-loan debt creates an undue hardship. Many base their analyses on the common Brunner test. To discharge student-loan debt in bankruptcy, the Brunner test requires that all of these elements be satisfied:

  • The individual cannot maintain a minimal standard of living if he or she must repay the student loans, based on current income and expenses.
  • Additional circumstances indicate that these financial conditions will remain for a significant portion of the student-loan repayment period.
  • The individual has made a good-faith effort to repay the loan.

If an individual is unable to prove undue hardship and the student-loan debt is not discharged in bankruptcy, he or she still may be able to modify the debt-repayment schedule through Chapter 13 bankruptcy.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, an individual with regular income creates a plan to repay most of his or her debts over a three- to five-year period. Similar to loan consolidation, individuals in Chapter 13 bankruptcy make single payments to one entity when repaying their debts.

However, filing for bankruptcy can hurt an individual's credit score and require multiple court appearances. For people seeking to extend their loan-repayment periods or to reduce the number of payments they make or creditors they owe, loan consolidation may be a better choice than filing for bankruptcy.

If you are struggling to repay your student-loan debt, contact a knowledgeable bankruptcy lawyers near me to discuss your options and whether filing for bankruptcy is right for you.