How to deal with student loans

By many accounts, student loan debt has reached crisis levels. Among our clients, it’s a huge issue that can be very difficult to solve. As total student loan debt in the United States approaches $1 trillion, many borrowers are going into default. On federal student loans alone, the number of people who went into default during the first three years after graduation was a staggering 13.4 percent. There are a few things borrowers can do to deal with runaway student loans.

1. If the loan is not in default. If a federal student loan is not in default, there are numerous repayment options available, including Income Contingent Repayment (ICR) and Income-Based Repayment (IBR). Each of these programs allow a borrower to pay a percentage of his income to his loans (sometimes as low as zero percent) and the remaining debt is forgiven after a number of years (20-25). The government has a web site that allows you to explore these options.

2. If the loan is in default. A federal loan goes into default if it has not been paid for more than 270 days. Once default occurs, repayment plans like IBR and ICR aren’t available anymore and the student lender can (and will) tack on a 25 percent collection fee to the balance. The lender can then garnish wages, etc. If a loan is in default, your best bet is rehabilitation. To rehabilitate the loan, the borrower makes “reasonable and affordable” payments for 9 out of 12 months. Once these payments have been made, the loan can brought back out of default. Once it’s out of default, ICR and IBR are on the table again.

3. Discharge outside bankruptcy.  A federal loan can be administratively discharged by the U.S. Government for a few reasons. These include things like the borrower becomes totally disabled or the school closes while the borrower is attending. These debts are discharged by a borrower submitting a form to to the lender.

4. Private student loans are a whole different story. Private student loans have hardly any of the protections that a federal student loan borrower has. If a borrower goes into default on a private loan, his best bet is just to negotiate with the lender for an affordable payment plan. On the other hand, private student lenders have to sue you to collect their money, while federal lenders can skip the legal process and go right to garnishment.

5. Discharge in bankruptcy. Contrary to popular belief, student loans can be discharged in bankruptcy, but it’s not always easy. A student loan can be discharged if paying it would cause “undue hardship” to the borrower. It’s not totally clear what this means, since different courts have interpreted this in different ways, but it’s definitely something more than just not being able to afford to pay off loan on a borrower’s current income. A borrower generally has to show that she will never be able to pay off the loan to have it wiped out in bankruptcy.

6. Payment plans in Chapter 13. One last option for borrowers struggling to pay private loans is Chapter 13 bankruptcy. In Chapter 13, a borrower can force the lender to enter a repayment plan over a five-year period.  This can be necessary where a borrower is being sued and the lender is demanding the full amount to be paid at once “or else.” The downside to this approach is that if the court-ordered payments are low enough, interest will accumulate faster than it’s paid off and the borrower will owe more at the end of the five years.

We can help explain any of these options to you. Get in touch if you want to discuss how to deal with student loans.

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