Anyone who has taken out a student loan knows they are the debt that keeps on taking. There are benefits to the federal loan programs: they are fairly easy to obtain and there are many options to manage payments including deferments and forbearances. These conveniences are balanced, however, by the government's guarantee that the loans will be repaid. No matter what. In fact, recently a law student was denied a law license -- despite the fact that he passed the New York state bar exam --- because he had nearly $500,000 in student loans which had gone into collections.
In the case heard today in the Supreme Court, baggage handler Francisco Espinosa testified that he was making $6.70 an hour, working 60 hours a week, when he applied for bankruptcy protection, NPR reports. He made a plan to repay the $13,000 in principal on the loan but could not repay the $4,000 in interest.
The legal debate hinges on timing: United Student Aid Incorporated, the student loan lender, had not filed an objection to the bankruptcy repayment plan within six months, and a judge approved the plan. When Espinosa fulfilled the requirements of the plan five years later, the loan interest debt was discharged by the bankruptcy court. The lender claims that was illegal, since federal statute mandates that for a student loan to be discharged, one must file a petition and appear at a hearing before the court (which the lender would also attend) to prove that it would indeed be undue hardship to repay the loan. A federal court ruled that the lender had not objected to or appealed the bankruptcy plan and therefore waived its rights of collection; that decision was appealed to the nation's highest court.
The case pits the bankruptcy code against the student loan repayment requirements set by Congress. In the hearing, the justices expressed concern that a ruling for Espinosa would not only shift the current burden from the debtor to the creditor but may also make it easier to discharge typically non-dischargeable debts such as child support, taxes, and, of course, student loans. The Supreme Court is expected to decide on the case next year.
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