In assessing what courts call the “good faith” standard, the Department of Education will focus on objective criteria reflecting the debtor’s reasonable efforts to earn income and manage his/her expenses. A debtor will not be disqualified based on past non-payment if other evidence of good faith exists. They will review the debtor’s payment history.
The Department of Education will look to see if the debtor has contrived a hardship for the purpose of getting their student loans dismissed. Examples of good faith include: (1) making payments (2) applying for deferment or forbearance (3) applying for income based repayment options (4) applying for federal consolidation loans (5) responding to outreach from a servicer or collector (6) discussing payment options, forbearance and deferment options, or loan consolidation with the Department of Education; (7) engaging a third party they believed would assist them in managing their student loan debt and/or (8) Debtor’s efforts to obtain employment to maximize income and minimize their expenses.
Acceptable explanations, or evidence for not enrolling in an income-based repayment plan include: (1) the debtor was denied or discouraged from using income-based repayment and instead relied on an option like forbearance, or deferment; (2) the debtor was provided inaccurate or incomplete information about the merits of an income based repayment plan; (3) debtor believed that an income based repayment program would not have improved their financial situation; (4) debtor was unaware that an income based repayment was an option; or (5) debtor was concerned with the potential tax consequences of loan forgiveness at the conclusion of an income based repayment program. Our next blog will address how the debtor’s assets play a role in dischargeability of student loans.
The next step in the analysis for the Department of Education, after determining your present ability to pay your student loans is to evaluate your future ability to pay your student loans. The debtor is presumed to have an inability to repay their student loan debt in the following circumstances: (1) debtor is age 65 or older; (2) debtor has a disability or chronic injury impacting their earning potential; (3) debtor has been unemployed for at least five of the last 10 years; (4) debtor has failed to obtain a degree for which the loan was procured; or (5) the loan has been in a payment status other than “in school” for the last 10 years. Where such factors are not present, the Department attorney will assess whether the debtor’s present inability to pay is likely to persist. This is a rebuttable presumption.
For example, if the debtor has not finished a degree, but has job offers and is making more money than if they would have if they obtained their degree, then it would be rebutted that the debtor has the ability to pay their student loans since the lack of a degree is not affecting his/her earning potential. If the borrower is married, the spouse’s income will not be counted in determining undue hardship eligibility, provided that the joint debtor is not a co-borrower on the student loans. This is different than the requirement on the bankruptcy petition which requires the debtor to include their spouse’s income even if the spouse is not filing for bankruptcy.
There is no presumption of inability to pay if the debtor obtained their degree in a field with limited earning potential. If debtor has $100,000 in student loans but doesn’t have earning potential of ever making $50,000 with their degree, the debt won’t get discharged. Someone in that situation would need to do an income-based repayment. Our next blog will examine the Department of Education’s standard of good faith efforts to repay your student loans to obtain a discharge.