Student Loan Relief and Bankruptcy
As the cost of a college education has risen, so has the number of graduates carrying a substantial amount of student loan debt. Ideally, students use their degrees to land well-paying jobs and quickly pay off their loans. But job markets are cyclical and careers don't always go according to plan. This section covers the basics of student loan debt relief and the various options available to debtors. Topics include the different ways graduates can repay their loans, options for debtors who simply cannot afford to repay their student loan debts, and the consequences of defaulting on one's student loans. Check out FindLaw's Guide to Student Loan Debt for a printer-friendly reference guide with summaries on how to handle your debt, and what to do if you cannot afford payments.
Difficulties with Student Loan Repayment Options
Student loans can represent a significant expense and when financial difficulty arises many are unaware of the options to manage student debt. Since defaulting on a loan can result in serious consequences there are a number of options available to many borrowers. Some loans can be delayed through deferment or forbearance options, allowing the borrower to postpone payment. Some loans can be cancelled, thereby eliminating payments. Some loans are eligible for income-sensitive or income-based repayment programs. And, finally, some loans can be more manageable when consolidated.
Deferment is a common means to address difficulty paying student loans. Deferment may postpone payment on a loan, and it may also prevent interest from accruing during the period of deferment, depending on the type of the loan. In order to qualify to have your loans deferred you must normally establish one of the common grounds for deferment. Although they may vary depending on your lender, common reasons for deferment include:
- temporary total disability;
- enrollment in a rehabilitation program for a disability;
- economic hardship;
- enrollment in school;
- entry into uniformed service;
- service to a needy population;
- work in health care or law enforcement.
Another option is to attempt to have your loans discharged through bankruptcy. However, this is very difficult, if not impossible, under the current law. Generally, student loans will not be discharged in bankruptcy unless the borrower can show that their repayment would impose a severe hardship on them, which is a very high standard.
What Happens after a Student Loan Default?
When a student loan borrower fails to keep current on their payments they become "delinquent" the first day they miss payment. If they remain delinquent for nine months the student loan enters default. The borrower may then be held liable for collection fees and the commission charged by any debt collection agency involved. The Department of Education has a number of collection options available to them.
The Department of Education may seize your tax refund to be applied toward defaulted student debt. Though borrowers may appeal the valid defenses are limited. If the loan was repaid, is being repaid under a negotiated repayment plan, belongs to someone else, or limited other circumstances the borrower may be able to prevent seizure of their tax refund. Alternatively, the Department of Education may seek to garnish your wages. They can garnish up to 15 percent of your disposable income, or no more than $217.50 per week. The defenses to garnishment are very similar to the defenses against the seizure of a tax refund.
Other options include seizing federal benefits such as Social Security retirement and disability benefits, the revocation of professional licenses, and lawsuits to collect from assets such as bank accounts, valuable property, and real property liens.