Obtaining a private student loan can be as easy as calling a lender on the telephone or filling out an online application. While you can easily be approved for tens of thousands of dollars within minutes, the repayment obligation could potentially last a lifetime. There is no such thing as loan cancellation or loan forgiveness when it comes to private student loans.
Bankruptcy Law
Even though most other forms of consumer and personal debt such as car loans, credit cards and mortgages can be discharged through bankruptcy proceedings, bankruptcy laws restrict borrowers from discharging their private student loan debt. Under the law, exceptions are only made in cases of "undue hardship." Even then, only a portion of the debt can be shaved off. Bankruptcy judges have varying interpretations of what constitutes undue hardship.
Brunner Test
To determine whether a student loan can be discharged based on undue hardship, most bankruptcy courts use a three-part assessment called the Brunner Test, which is named for an appeals court decision (Brunner v. New York State Higher Education Services Corp.). The three requirements of the Brunner Test are: The borrower cannot maintain, based on current income and expenses, a "minimal" standard of living for themselves and their dependents if forced to repay the loans. Second, additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans. Third, the borrower has made good faith effort to repay the loans, which includes striving to increase his income by going back to school for more job training and attempting to consolidate the loans. As of 2011, court interpretations of the three criteria have become increasingly stringent.
History
Private student loans were not always as difficult to discharge as they are in 2011. In the early 1970s, many people filed bankruptcy specifically to get rid of student loan debt. Congress took steps to prevent debtors from getting rid of student loan debts through discharge within five years of graduation. The bankruptcy code was changed in the 1990s to extend the discharge limit to seven years. In 2005, the law was changed again, making it nearly impossible to discharge personal private students loans by filing bankruptcy.
Federal vs Private Student Loans
Although federally guaranteed student loans are not easily cancelled in bankruptcy filings either, they do offer fixed interest rates, flexible payment options and other consumer safeguards that make them a more favorable borrowing alternative for students. While many private lenders can, at their discretion, offer a deferment and sometimes a forbearance, they are not legally required to do so, as is the case with federal loans if borrowers meet certain requirements.
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