Bankruptcy

Student Loan Debt: Can it be Forgiven?

By Chris Kramer

Back in the good old days (that is, before the global economy took a nosedive), many states offered loan forgiveness programs for graduates who chose to work in public service once they got their degree.

Now, thanks to budget cuts and a lowered demand for student loans on the secondary market, many states have had to pare down their educational debt forgiveness programs.

How Do Your Loans Measure Up?

Federal student loans generally come from one of two sources: the Federal Family Education Loan Program (FFEL), which includes Stafford and PLUS loans, and the William D. Ford Federal Direct Loan Program.

Those with Direct Loans may qualify for more forgiveness programs, so if you have FFEL loans, you may want to consider consolidating your loans into one Direct Loan (the government websites above have details on how to do this).

Forgiveness for Members of the Armed Forces

• Interest accrual freeze: If you?re on active duty during war, mobilization or a national emergency and have a Direct Loan from October 1, 2008 or after, you may qualify to have your interest frozen for up to five years. This would prevent the amount you owe on loans from growing while you serve.
• Interest rate cap: If you join up after taking out a loan, you may qualify to have the interest you pay on that loan kept below a certain rate. Further, if you took out FFEL loans before August 18, 2008 and were an active service member at the time, you may qualify to have your interest rate capped at six percent.
• More forgiveness for Perkins loans: While five years of military service has long qualified you for a 50 percent forgiveness of Perkins loans, new rules allow 100 percent of such loans to be excused after five years for those who have served at least a year as of August, 2009.

Forgiveness for Teachers

• Multi-district workers: As long as you teach in economically disadvantaged areas (labeled as ?Title I? in the No Child Left Behind Act), you should qualify for forgiveness of FFEL and Direct Loans. Now, educational workers who teach part-time at more than one district or school can also qualify.
• Your subject matters: The amount of forgiveness you qualify for depends on what you teach. Those who become instructors in underserved areas (like high school math and science) can expect the government to cover more of their loans.

Forgiveness for Public Service

FinAid.org lists the ?service? career paths you could choose to have your loans forgiven, but the relief won?t be immediate. In fact, you?ll probably need to make payments and work in the field for a decade before your remaining debt is wiped out.

Student Loans in Bankruptcy

Student loans are one of the most difficult types of debt to discharge by filing bankruptcy. Debtors must prove that the loan presents an undue hardship, such as an injury that prevents the type of work for which the degree was earned. Additionally, the debtor must have made a good faith effort to repay the loan.

Additional Resources

No Child Left Behind: A Toolkit for Teachers (PDF)

Full post as published by The Bankruptcy Blog on September 17, 2009 (boomark / email).