And Forgive Us Our Debt


Financial debt is perhaps the most common factor impacting your net worth and finances. The list of usual suspects includes mortgages, credit cards and automobile loans. But what about student loans? According to one source, approximately 45 million Americans collectively owe $1.6 trillion in student loan debt or approximately 8% of national income. Furthermore, new data from the Student Debt Crisis survey indicates that 46% of federal student loan borrowers expect to struggle making payments once forbearance relief ends under the CARES Act. Are there options to improving your finances and managing your student debt?


Except for mortgages, student loans are the second highest debt existing today. Unlike credit cards, auto loans and others, student loans ordinarily cannot be discharged in bankruptcy. However, an exception exists if an individual is experiencing undue financial hardship. Undue hardship requires three factors:

1. The individual has made good-faith efforts to repay the loans

2. Based on your current income and expenses you cannot maintain a minimal standard of living for yourself

3. Other circumstances exist where you will be unlikely to repay the loan.

The undue hardship standard is sometimes referred to as the “Brunner test.” The best way to see if you qualify is to read the case, Brunner v. New York State Higher Education Services Corp. Easier than that, just google Brunner test and bankruptcy. See if this is an option to address your student loan financial debt.

Discharge of Student Loan?

A Brookings Institute projection suggests that nearly 40% of all borrowers who started college in 2003-2004, would default on their student loan by the year 2023. Defaulting on your student loans could result in wage garnishment, lower credit scores and loss of federal income tax refunds. Discharge or cancellation of your student loans would in most cases result in taxable income being reported to the Internal Revenue Service (IRS).

However, the result may translate into a better financial position for you. For example, if you are a single person with taxable income of $50,000 and a student loan of $70,000 and your debt were to be cancelled, your taxable income would now be $120,000.00 (50,000.00 + $70,000.00).

Now you are probably saying how does this make me better off? Simple! The additional $70,000.00 in income from the debt being cancelled, would increase your tax liability by an estimated $16,800. The question now becomes, would you rather pay $70,000.00 in student loan debt or have it cancelled, reported to the Internal Revenue Service (IRS) as income and only have to pay an additional estimated $16,800.00 in taxes? Your call!

There are other options available in resolving your student loan debt. As you resolve to be better in your finances this year, take on the financial encumbrances which are impeding your success.

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