Studen Loan Debt &
Try to Limit Student Loans
While in a Tucson Bankruptcy Court, I heard a judge say “education now costs more than it’s worth.” This concept, though a sad reality, is one of the most important issues in our office. We can simply resolve most unsecured debt, however, student loan debt has limited options. The advice we give all clients and their children is to pursue the least expensive route to a higher education, such as attending community college first. We advise clients to avoid the popular online colleges and expensive private colleges that often have no admission standards, and function more as a lucrative business than a higher education institution.
We also advise clients to pursue a vocational study with, as best as possible, an end career in mind. An individual should know what their desired career position will pay and estimate the cost of college to get there. Some positions are better left as a recreational interest, versus a career path. For instance, attending the University of Phoenix to get a criminal justice degree may leave a student in tremendous debt with limited earning potential. Yet, some low paying career paths offer student loan forgiveness options that should be explored. The cost of college now forces consumers to weigh these decisions carefully. That said, college is still important.
Paying for College with Student Loans
There are two general sources for student aid: Private loans and Federal loans.
Private loans are issued by private banks and are based on an applicant’s credit worthiness. Private student loans can be settled, but are non-discharged in bankruptcy.
Federal student loans, on the other hand, are not based on credit scores, and have even fewer options. Federal student loans may require less stringent credit requirements, and have more attractive terms when compared to most other borrowing options. They may offer lower interest rates set by the government, the ability to postpone making payments under certain circumstances, and longer repayment terms.
Consumers should apply for the least amount of student loans as necessary to get them through college.
Student Loan Deferment, Forbearance, and Repayment Plans:
While in college, or once out, student loans can be deferred or put in forbearance. If a debtor is current on their loan obligations, the loans may be eligible for deferment. A deferment is a legal right of the student debtor in particularly difficult circumstances. A “deferment” means the repayment terms are suspended (for up to three years for federal loans). Typical deferment scenarios include the following:
- permanently or temporarily disabled
- demonstrate an economic hardship (as defined by the lender)
- still enrolled in school
- deployed in military combat
- providing medical care in a poor area or to the needy
If a debtor requests forbearance, they must stay current until the request has been granted. Forbearance is an alternative if not eligible for a deferment. A forbearance is also suspension of repayment or a reduction in the monthly payment. However, the unpaid interest will be added to the loan balance (capitalized), regardless of whether the loan is subsidized or unsubsidized.
There are several repayment options, such as graduated repayment (payment increase over the life of the loan), extended repayment (extended the length of the loan beyond 3 years), and contingent-based repayment (payments fluctuating based on income). These options should be applied based on an individual’s current and future earnings. Federal student loans can be consolidated, which provides for a lower overall payment and convenience.
Defaulting on Student Loans
A “default” on student loans occurs when there has been no payment on student loans for a set period of time (usually 180 days) and there has been no negotiation/communication regarding payments. To avoid default, a struggling debtor can make single payment to reset clock. Non-payment forces the loan into collections and creates costs that will be rolled back into the balance. While in collections, debtors have limited options and have demonstrated faithful repayment to get the loan out of collections and back to the servicer.
Settling Student Loan Debt & Loan Cancellation
Our office can negotiate settlements with Private student loans. Unfortunately, federal student loans have regulations that do not accommodate settlement options. Private student loans can be negotiated after default has occurred, and can be settled even with a pending lawsuit. Student loans can also be forgiven or cancelled in the event of permanent disability or death. Some loans, such as Perkins Loans, can be cancelled for teachers working in low income areas for more than 5 years. Occupations in the social field that provide minimal income and assist low economic areas should explore loan cancellation programs.
Bankruptcy and Student Loans
Discharging a student loan in bankruptcy is an incredibly high burden for a debtor to meet. The three-part analysis for an Arizona bankruptcy court to discharge a student loan debt requires a showing that:
- the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living;
- the current economic status is likely to persist for a significant ongoing portion of the repayment term
- the debtor has demonstrated a good faith effort to try and repay the loan(s).
This analysis seems straightforward and achievable, but in actuality it is tremendously hard to meet this threshold. The public policy, the bankruptcy code, and applicable case law universally aim for keeping student loan debt non-dischargeable. An alternative to discharging the debt is to use a Chapter 13 bankruptcy to keep the loans tied up for 5 years in bankruptcy court, which can give debtor breathing room.
See this great website to get additional information: Student Loan Borrower Assistance. This website provides an even more in-depth information on guideline options, repayment, and consolidation. Also feel free to contact our office if you need assistance settling private student loans, or placing the loan(s) into a 5 year Chapter 13 proceeding.