College Tuition & Bankruptcy

Posted by Kevin on August 8, 2011 under Bankruptcy Blog | Be the First to Comment

Many middle class families find themselves in economic distress when the kids go to college.  Well, unfortunately, the bankruptcy code does not help those families.  It basically says that if you have to choose between paying your creditors and Junior’s tuition, Junior is SOL.

Under the Code, you are allowed $137.50 per month on the Means Test for the education of a child under 18.  You are also allowed to deduct for the education of physically and mentally handicapped dependents.  But your college freshman who is 19 is not considered a child.  So, when you are putting together your budget under Schedules I&J, tuition and room expenses are not to be considered.  (I argue that you can include a certain amount for food because if they were home, you would have to feed them.)  If you are paying $1500 per month on tuition and room, then that amount should be available for creditors.  If you are above median income, you could be pretty sure that you will pushed into a Chapter 13.

On the back end, substantially all students loans are not dischargeable.  Lot’s of young adults are starting out life with $150,000 debt or more before they get their first paycheck.

What to do?  Maybe, it is time that we re-assess the cost of college.  College cost has risen at about twice the rate of inflation over the last 30 years.  Frankly, I believe that most colleges will price themselves out of the market in the next 20 years.  Absent that, parents have to be more realistic and more creative.  You have to find less expensive alternatives like community college or live at home college.  You have to look into ROTC and other programs that will defray costs.  Because the bottomline is that you are not going to get any help from the bankruptcy code.