Student Loans and Bankruptcy – Which Way Do I Go?

The topic of student loans and bankruptcy has been well documented on this site; however, we have never discussed which student loans are the best for a new student who is just entering into college or graduate school.  As a bankruptcy attorney, I see people who made decisions in the past, which at the time, were excellent decisions.  Over time, some of those decisions/investments didn’t turn out so good for them.  Recently, I’ve turned my attention to student loans as they now eclipse credit card debt.

Student loans come in various forms; however, the question I pose today is:  Which are the best loans for a new student?  Are private loans or federal loans better?  The reason I pose this question is because many new graduates cannot find good paying jobs.  The lack of high paying jobs creates a problem when it comes to paying back the student loans.  What if that person has to consider bankruptcy?  Well, we can start with the proposition that no student loans are dischargeable in bankruptcy without an undue hardship. 

The argument is simple, yet no answer is immediately forthcoming.  If I advise someone to take out a Federal Loans to pursue their education.  Let’s say that person wanted to go to college to pursue a degree in the area of law enforcement.  Under the current Department of Education repayment guidelines, that person may be able to discharge the unpaid portion of their student loans after a ten (10) year income based repayment plan.

However, if the same person takes out private student loans for the same amount of money, they may be still repaying those debts well beyond the ten (10) year period.  Now, here comes the hard part.  What if Congress decides to change the law and make the private student loans dischargeable in bankruptcy?

Now the game changes, and that decision you made to take out the federal student loans wasn’t the best decision after all.  Of course, there are no guarantees in this world, and I certainly do not have a crystal ball; however, I do have the ability to advise people on which steps to take to protect themselves from consumer scams and rip-offs.

Here there really is no easy answer.  If a person takes out federal loans and Congress makes the private loans dischargeable in bankruptcy, the consumer loses the bankruptcy protection if they need it.  If the consumer takes out private loans in the anticipation that Congress is going to make the private loans dischargeable in bankruptcy, and then Congress doesn’t act, the consumer loses because private loans do not offer the many options offered by the Federal Student Loan Program.

What is the alternative?  Well, I guess, we can all rely on our parent to pay for the sky-rocketing cost of higher education.  This option may be available to a select few.  Option 2 is that a consumer can take out no loans and not go to school.  Or better yet, wait for the Government to act.  Hmmm.  Not a very good option for future job prospects for the vast majority.  Third, a consumer can put all their eggs in one basket, either federal loans or private loans, and hope for the best.  Lastly, the consumer can make sure to take a mix of federal and private loans in an attempt to hedge their bets.

Any decision you make is a crap shoot.  Well, there is always Vegas and the World Poker Tour for the truly daring.