A new Wall Street Journal article details some potential issues with Chapter 13 plans and student loans. As most people have either heard or learned, student loans, without any additional efforts, are not discharged in a bankruptcy case, regardless of the chapter of bankruptcy that the person files.
In Chapter 13 bankruptcy filings, most people will defer their payments on the student loans. However, because of the interest rates, these loans continue to grow.
Here is one quote from the article:
Consider a graduate-degree holder who owes $55,000 on private and federal student loans and can’t afford to pay any so-called nonpriority unsecured debt (which excludes some taxes but includes consumer debt such as credit-card debt and medical bills) during a Chapter 13 case’s repayment period. (Payment percentage rates vary widely, but it isn’t uncommon for a borrower to pay nothing.)
If $45,000 of that borrower’s debt is a federal loan with 6.8% interest, and the borrower didn’t make any payments on those loans, the balance would grow to $60,300 after five years, said Mark Kantrowitz, publisher of Edvisors.com, an education-finance information provider. The remaining $10,000 in private loans, with an interest rate of 10% and capitalization at the end of the bankruptcy—when accrued interest is added to the principal—would grow to $16,000, he said.
That means that even without adding late penalties or collection fees, the borrower’s student-loan balance would have grown to $76,300.
If you have student loans, make sure you know what you are getting into before filing. Be prepared for a higher balance, and higher payments.