CAN I DISCHARGE MY STUDENT LOANS? WHAT ARE MY OPTIONS?
August 17, 2016 | BANKRUPTCY
What every student loan borrower, cosigner, and parent needs to know about student loans.
Can I discharge my student loans? What are my options?
Student loans are being dubbed as the next bubble to burst. According to 2012 reports from the Consumer Financial Protection Bureau and the Federal Reserve Bank of New York, Americans owe between $902 Billion and $1 Trillion in student loan debt. Comparatively, when the bubble burst on the housing market, there was approximately $14 Trillion of outstanding mortgage debt. An important difference to note is that mortgage loan debt is secured debt and dischargeable in bankruptcy, whereas student loan debt is unsecured and not dischargeable in bankruptcy. Basically, this means that student loan lenders have no leverage on the debt the hold, other than the threat of ruined credit and debt in perpetuity for the borrower. There is basically no recovery for a student loan lender on a defaulted loan, other than collection in garnishment.
What does this mean for lenders and what does it mean for student loan borrowers? Overall, if the income from borrowers paying on student loans is insufficient to meet or exceed the amount the lenders need to balance their books, the lenders will struggle, eventually lenders will look to write down or sell those loans, and finally they will restructure or close shop. For investors, student loan debt still appears a good debt to buy, because it is currently undischargeable. So, as borrowers may have already noticed, their student loans are being sold to other companies. All of a sudden, a borrower will get a letter from another student loan lender telling him that his loan has been purchased, by Nelnet, or ACS for example, and the borrower will begin payments to the new lender. Another sign of the student loan debt problem we are now seeing is companies beginning to market themselves as a “student debt relief” company. These companies are nothing more than a middle man, costing you money, a rip off just like the tax relief companies. Do not fall for the trap, stay away from these empty promises. So, as a student loan borrowers what are your actual options?
As of June 2014, Federal laws remain in place to prevent student loan discharge. There are exceptions, but they are rare. Eventually, and hopefully soon enough, the tide will turn and the law will change. Today, bankruptcy courts, even some that are known for lender-friendly rulings, are beginning to distinguish between borrowers who “benefited” from the student loan and cosigners who only vouched for their son, daughter, niece, nephew, or grandkid. Precedent is still, unfortunately, very lender-friendly. Still, it is foreseeable that more borrower-friendly options will soon be available. Until then, paying 2, 3, 4% or even 8% interest on principal + 100% of the balance is the first option. Aside from repayment according to the terms of the loan, here are some additional options:
Discharge (Very rare)
- By application directly to the lender and at the lender’s discretionary approval;
- By filing bankruptcy. But a realistic bankruptcy attorney would advise, depending on the district of filing, that the borrower must be permanently incapacitated and unable to ever earn future income to qualify for student loan discharge in bankruptcy.
- By application directly to the lender. The remaining borrower must meet certain on-time payment criteria; income documentation from both borrowers may be required. While this does not eliminate any debt for the main borrower, it will eliminate 100% of the liability for the co-signor
Income based repayment plan (IRB); aka Income contingent repayment plan
- This program is only available for Federal Direct student loans. FFEL and Parent Plus loans do not qualify. The IRB plan ties your monthly student loan payment to your monthly household income and family size. The calculation could yield a lower monthly repayment. However, married couples each with student loans likely will not qualify for this option. Borrowers with many different, lenders likely won’t qualify either. This option is only available for Federal student loans. After 25 years of repayment on an IRB plan, the remaining balance of the loans included in that program will be forgiven. You will be taxed on that income forgiveness.
The Pay as you go program (Scheduled to go into effect at the end of 2015)
- Similar to the IRB program. Caps repayment at 10% of your monthly discretionary income (determined by IRS standards). After 20 years of repayment in the program, the remaining balance of the loans included in that program will be forgiven. You will be taxed on that income forgiveness.
Public Service Loan forgiveness (PSLF)
- For student loan borrowers working full time in a public service job, a potential way to resolve student loan debt could be to apply for the public service loan forgiveness program through your lender. Documentation and repayment during the required term prior to forgiveness is required. The biggest concern here is that this program is subject to revision at the whim of the government offering the relief and has already seen major changes to the relief offered including caps on forgiveness and stricter repayment and documentation requirements prior to forgiveness.
- Here your initial payments are lower, possibly beginning with interest only repayment, then stepping up later to payments to principal and interest. There is no forgiveness of balance here, it is just a way for a borrower to structure repayment of the full amount of the loan over the entire loan repayment period.
- Increases the amount of time you have to repay your loan resulting in lower monthly payments but overall you will pay more interest over the life of the loan.
- Equal monthly payments on the loan that go toward principal and interest over the term of repayment until the loan is paid in full.
Forbearance and deferment
- This is the opposite of repayment. It is basically a pause button on repayment. The interest on your loans will continue to accrue here. The only benefit is that your lender has agreed to pause your repayment for a period of time and allow you to begin repayment later. These options are limited based on the type of loan you have. Contact your lender to discuss whether you qualify.
- This option may be available to help you get out of default. Many lenders will still only consolidate Federal Student loans. Private student loan consolidation companies are difficult to find. With this option, if you qualify, the student loan consolidation company weighing the interest rate of all the loans to be consolidated and combines them into one loan with one interest rate. The benefit to borrowers, other that bringing loans out of default is ease of repayment and contact with their lender for sometimes several loans and companies to one loan, one company, one payment due date.
Foreseeable future solutions:
- One of the most desirable options for borrowers and lenders both would be an interest rate tax benefit on repayment. Or an interest rate reduction. Or both. A federal student loan consolidation program at a reasonable 3% rate over the next 10-15 years (depending on total debt) with all interest completely tax deductible would spawn a flurry of consolidation and aggressive repayment.
- Allow a moratorium on collection of interest. During this time all payments made are applied to principal, this will spawn a flurry of borrower repayment.
- Better options from student loan consolidation lenders, including more availability to private loan consolidation. Possible quasi-consolidations combining both private and federal loans with one company. Loans retain their separate qualities within the consolidation loan and are treated as such according to the law and the master promissory note but provide borrowers with ease of one monthly payment.
If you are struggling with student loan payments The Nesbitt Law Firm can help to protect you from garnishment, creditor calls, and default. Restructure your monthly payments to an affordable amount. Call today for a confidential consultation with our experienced attorney.