On rare occasions, a potential bankruptcy client will say something that makes me fall out of my chair. Having spent four years of college in New York City, it is fairly difficult to shock me. However, misuse of student loans are one of those things that make me fall out of my chair. Why?
First, let me lay some groundwork about student loans and bankruptcy. As a general rule, you cannot eliminate student loans in bankruptcy. If you are able work, you will not be able to wipe out student loans in bankruptcy. Student loans are basically a form of modern day economic slavery. For most people, the student loan debt is not going away until the entire debt is paid.
In contrast, unsecured debt like credit cards and medical bills can be eliminated in a Chapter 13 or a Chapter 7 case.
A few weeks ago, a potential client informed me that she had received a lump sum of student loan money for her living expenses for the coming year. Instead of using this money for it’s intended purpose, she used it to pay off her credit card debt. Her reasoning was that the student loan interest rate was extremely low and the credit card interest rate was extremely high. Was this a good move? In her case, the answer is absolutely no! She took some debt that we could have eliminated in a bankruptcy case and transfored it into debt that we will never be able to eliminate in a bankruptcy.
I’ve also had potential bankruptcy clients ask me my opinion about using student loan money as a down payment on a house. Currently, housing prices in the Northwest Georgia area are extremely low because of this awful economy. Even though it is a great time to purchase a house, I think it is a terrible idea to use student loan money as a down payment on a house. When it comes to student loans, you are playing with fire. What will you do if the house turns out to be a lemon? What if you have trouble making the future mortgage payments and it gets foreclosed?
When it comes to student loans, my advice will always be to borrow as little as possible to get your degree. Once you get your degree, pay those student loans as quickly as possible and set yourself free from the bondage.