The numbers on repayment of a student loan for four years at a private university are brutal.
No matter how enriching the education, the loan may be the financial death of the graduate.
But what sorrows me is the plight of the parents of those same students who have guaranteed or cosigned those loans.
Cosignor equally liable for loan
The co signor isn’t a second line of recovery that the lender can tap if the borrower doesn’t pay. The lender can go directly to the co signor for payment.
More frightening, the cosignor has no control over whether the loan gets deferred (with interest during deferment added to principal) or whether the student honors the commitment to pay.
On the numbers in Gene Melchionne’s article , you can see in an instant why the student borrower might not be able to pay, even assuming the graduate got a decent job. The payment on loans for a 4 year private college degree equal the average after tax income of a new college graduate!
That’s right: the student loan payment takes ALL of the typical grad’s after-tax income.
Default seems inevitable, and the parents who cosigned are on the hook.
Student loans in bankruptcy
The cosigned loan is a non dischargeable debt should the parents file bankruptcy, without taking any further steps. To discharge a student loan, you have to file an adversary proceeding in the bankruptcy court and prove to a judge at trial that repaying the loan as written is an undue hardship.
Historically, the test for undue hardship has been remarkably harsh. Courts in the 9th Circuit have embraced a middle ground in a non dischargeability cases: partial discharge.
The court can find that repaying all of the loan is an undue hardship, but repaying some part of it is not. The borrower or cosignor walks out of bankruptcy court with a smaller student loan burden.
I’m seeing a fair number of folks in their late 50’s and 60’s, nearing retirement, or enduring unemployment,with their kid’s student loans a millstone around their neck.
Frankly, I’m waiting for a stalwart couple of a certain age for an opportunity to argue to a bankruptcy judge that repayment of the offspring’s student loans at this point in the parents’ life is an undue hardship.
At least one prominent bankruptcy judge has made the case that the test for measuring undue hardship belongs to a long-gone era of student loans.
In Roth, Judge Pappas put out the argument that the Brunner test’s harshness could be understood when student loans could be discharged after a relatively short number of years. Applied in today’s setting of perpetual indebtedness, the rule was an anachronism.
Let’s hope his view catches on.
Image courtesy of besighyawn.