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Bankruptcy may be an option for those with high-interest student loans

College student Loan Debt
Posted at 11:32 AM, Jan 31, 2022
and last updated 2022-01-31 14:32:56-05

Millions of people have gotten a break from paying their federal student loans during the pandemic. But there's been no relief for millions of others with private student loans who may not realize bankruptcy could be an option.

"For folks that have lost their jobs during the pandemic that are struggling for money that are still struggling to stay afloat, bankruptcy might be the best option for them," said Mike Pierce, the executive director of the Student Borrower Protection Center. "Particularly, if they're already going to file bankruptcy because of medical debt or credit card debt, being able to escape these often very high-interest rate private student loans is a lifesaver."

The Student Borrower Protection Center estimates $50 billion in private student loans taken on by more than 2.6 million borrowers is eligible to be discharged in bankruptcy.

"Our investigation found evidence that for years, big and small companies across the country have been telling borrowers that they're not eligible to discharge their loans and bankruptcy, while also telling their investors that law actually says you can discharge these in bankruptcy," Pierce said.

Navient, a loan servicer and a group of 39 state attorneys general, recently reached a nearly $2 billion settlement. The servicer is denying any wrongdoing.

Attorney Christie D. Arkovich has been helping people file for bankruptcy with their student loans since 2016 but says only a small number of people are aware bankruptcy is an option.

"Normally when we have a client come to us they're either in default on a student loan, or they're making payments and it just not making any headway," Arkovich said. "So the people who this wouldn't be for people who can easily afford their loans. Most of our clients cannot afford their loans. They're there another mortgage payment, basically."

Arkovich's clients range from people in their 30s to people in their 60s. Most have student loans with high-interest rates from the mid-2000s.

"We had a client who owed around $130,000, and so when she first came to me, she was paying $1,300 dollars a month, and it was interest only," Arkovich said. "So, she realized this is a forever debt. She's not making a dent in it, it's never going away. So, we reopen an older bankruptcy and we ended up settling that for $24,000, so that was less than, what, 20, 22 cents on the dollar for payments very, very low."

Arkovich says one of the biggest concerns for the people she works with is how a co-borrower on the student loan will be affected. The settlement can work out so that the servicer won't go after that person.