Over 21 percent of student loan borrowers who attended a for-profit college default on their student loans within 3 years, according to a report released by the U.S. Department of Education. For-profit colleges claim that the high numbers of low-income students attending their institutions are inflating their default rates. So does being a low-income student increase your chances of defaulting on your student loans?
It’s important to note that student loans are nearly impossible to discharge in bankruptcy. Therefore, if it is true that low-income students are at a higher risk of defaulting on their student loans, lower-income graduates may be facing disproportionately more risk when they take out student loans. Those same students may find that lacking the financial literacy of their richer peers, they end up with more debt overall, including credit card debt and car loan debt, in addition to their student loans.
And for students attending expensive for-profit colleges and graduating with a lot of student loan debt , filing bankruptcy may be the only way to discharge other debts (credit cards, payday loans, medical bills etc.) and free up their income so they can pay on their student loans. In that way bankruptcy is very effective in discharging other debts which will enable a debtor to effectively manage and eventually payoff his/her student loan debt. While there have been some student loan debtors who were able to discharge part of their student loan debt in Chapter 13 bankruptcy , the creditor is challenging one of rulings and the case has gone all the way to the supreme court. (see: Supreme Court Loan Dispute )
While many legislators hope to make student loans more easily dischargeable or at least negotiated in bankruptcy, the best defense for low-income students is to never over-borrow, keep track of what you owe and make a plan as to how you will repay the debt if you are not earning a high salary once the loans become due.