1/16/2012 3:12 PM ET | By Liz Weston,
There’s no easy way to escape from your college loans, but for most people, options such as repayment and forgiveness plans do exist. The point is to avoid defaulting.
Here are two things you need to know about student loan debt:
1. There’s no magic wand that makes it easily disappear.
2. The more desperate you are, the fewer options you may have for relief.
The rising default rate on federal student loans reflects these realities. The U.S. Department of Education in September said 8.8% of borrowers had defaulted in their first two years of repayment, up from 7% the previous year.
That’s just the tip of the iceberg. When the window is expanded beyond the first few years of repayment, the default rate soars. One in five federal student loans that entered repayment in 1995 has gone into default, according to a review by the Chronicle of Higher Education.
Still, most people have better options to deal with their education debt than to simply stop paying it. A smart repayment approach can get you out of debt faster or at least make your loans more manageable as you build the rest of your financial life.
Here’s what you need to know to start planning your escape from student loan debt:
Understand the trade-offs
Federal student loans offer a variety of repayment options. If the payments on the standard 10-year repayment schedule are too high, you may be able to get extended plans that lower payments by stretching your loan term out to as many as 30 years. Or you can ask for graduated payments that start smaller and get bigger over time. Or you can take advantage of repayment plans based on your income.
The longer you take to pay back the loan, the more interest you’ll pay. Switching from a 10-year to a 20-year plan, for example, will cut your monthly payment by about one-third but will more than double the total interest you’ll pay, said financial aid expert Mark Kantrowitz, the publisher of FinAid and Fastweb.
If you have a manageable amount of federal student loan debt and can afford to make the bigger payments, you should do so. But consider opting for lower payments, even though you may pay more interest, if:
- You really can’t afford a larger payment right now.
- You otherwise couldn’t save for retirement.
- You have private student loan debt in addition to federal loans.
Focus on your private student loans first
Unlike federal student loans, private student loans have variable rates. Even if the rates are low now, they likely won’t stay that way for long, Kantrowitz said.
Private student loans also have fewer consumer protections and repayment options than federal loans, plus no forgiveness options — more reasons to dispatch this debt as fast as you can. Consider paying the minimum possible on your federal loans so you can throw more money at your private loans. Your lenders can help you compare your repayment options; if you’re not sure who holds your loans, start your search here.
Consider income-based repayment plans
Federal student loans offer three repayment options that are tied to your earnings: income-contingent, income-sensitive and income-based. The income-based plan is the most generous and can even get your payments down to zero if you’re poor. The plan caps payments at 15% of your so-called discretionary income, which is the difference between your adjusted gross income and 150% of the federal poverty line.
This cap will fall to 10% in 2014. (The cap will fall this year for certain borrowers, who will be notified this month by mail if they’re eligible for lower payments. To qualify, the borrowers can’t have taken out any loans before 2008 and must have taken out one new loan in 2012.)
Explore your forgiveness options
The balance of your federal loans can be forgiven after 25 years of on-time payments if you’re in the income-based repayment plan. That term will drop to 20 years starting in 2014 and will drop this year for a select group of borrowers — who, again, will be notified by mail if they qualify. The clock generally starts when you enter the income-based repayment program.
You can get your balance erased in just 10 years if you’re in the income-based repayment plan and work in certain public service jobs, including teaching, health, military and public safety jobs. (See a complete list here.)
You also can get some or all of your federal loans forgiven through volunteer work, military service or working in certain high-need areas. Service in AmeriCorps or Vista, for example, can earn you a $4,725 stipend toward paying off your loans. Participating in the Army National Guard can earn you up to $10,000 for loan repayment. Doctors and nurses can get loan forgiveness through the National Health Service Corps or the Nursing Education Loan Repayment Program if they work for a few years in areas that lack adequate medical care. Teachers have a number of options for forgiveness if they work in disadvantaged areas or with special-needs children. For more, visit FinAid’s page on loan forgiveness.
Don’t ignore your debt
Defaulting will trash your credit, which will make it harder for you to get other loans and may impair your ability to get a job. You could be sued and have your wages garnisheed. Your income tax refunds could be withheld, and you might not be able to get or renew professional licenses.
If you really can’t pay your federal loans, even under an income-based repayment plan, consider applying for a deferral or forbearance — which will allow you to suspend payments for a time without penalty, although interest will still accrue — rather than simply ignoring your debt. You must apply for deferrals or forbearance before your loans go into default. (Default is defined as being more than 270 days overdue on your federal student loans or 120 days overdue on your private loans.)
Private student loans have fewer options when you can’t pay, but a one-year forbearance may be available, or you may be able to get extended-payment plans.
If you’ve exhausted all your repayment and forgiveness options and still can’t pay, you should:
Understand your worst-case options
Student loans are different from most other debts. Education debts typically can’t be erased in bankruptcy court, and there’s no statute of limitations on how long a lender can pursue you for what you owe. Age or disability won’t protect you: The U.S. Supreme Court ruled against a 67-year-old disabled man who lived in public housing, deciding that he had to give up 15% of his $874 Social Security check to pay back defaulted student loans.
Because they have such powers to pursue you, student lenders aren’t going to settle your debt for a fraction of what you owe, as a credit card lender or collection agency might. But Kantrowitz said that people who have lump sums to offer may be able to negotiate small discounts on what they owe, such as 10% off the total amount or forgiveness of half the interest accrued since defaulting. Again, this assumes you have a lump sum, such as an inheritance or a loan from your parents. If you have to make payments, you’ll be stuck paying off the full amount you owe.
Bankruptcy almost certainly won’t help you get rid of your student loans. Of 72,000 filers who asked for discharge of their student loans in 2008, only 29 were granted any relief, according to student loan guarantor Educational Credit Management, the U.S. Department of Education’s designated provider for student loan bankruptcy services. Borrowers essentially have to prove not only that their financial situation is dire but that it’s unlikely to ever improve — which is a harsh standard to try to meet, Kantrowitz noted. If you’re permanently and totally disabled, you may have a shot; otherwise, fuhgeddaboudit.
Bankruptcy may, however, wipe out enough other debt to give you the ability to start repaying your student loans. Credit card and medical bills are among the debts that can be erased in a bankruptcy filing.
If you’re really up against a wall, consider talking to a bankruptcy attorney about your options. You can get referrals from the National Association of Consumer Bankruptcy Attorneys.
Liz Weston is the Web’s most-read personal-finance writer. She is the author of several books, most recently “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Click here to find Weston’s most recent articles.
Are you an honest individual who is overwhelmed by debt,
facing a foreclosure or considering bankruptcy?
In times of financial trouble, everyone needs solid legal advice, practical wisdom and common sense. Our law firm provides legal services to Massachusetts families and individuals in need of experienced legal counsel and possibly Bankruptcy protection. This is what we do. We have built our reputation on assisting honest people burdened with overwhelming debt obtain what the United States Federal Bankruptcy Courts refers to as a “fresh start” or what we call “regaining your financial control”.
I am proud to have helped thousands of individuals and families in the course of my practice. My office has provided guidance to our clients to work their way from unmanageable debt to regaining financial control. My office is not a “bankruptcy factory,” where clients are processed without regard to their individual needs. Rather, I build relationships and represent people not only in their bankruptcies, but with their other legal needs. In fact, knowing my clients and their families is the only way I can understand their individual goals and aspirations. I understand that nobody wants to talk about bankruptcy with a lawyer. I have learned over the years that clients filing for bankruptcy are not trying to avoid their responsibilities, but are looking to alleviate a difficult situation. You owe it to yourself to consider all of your options. I look forward to meeting you, answering your questions and helping you and your family.
- Michael T. Eramo
In times of financial trouble, everyone needs solid legal advice, practical wisdom and common sense. Our firm provides legal services to individuals and small businesses in need of experienced legal counsel and possibly bankruptcy protection. This is what we do. We have built our reputation on assisting honest people faced with overwhelming debt obtain what the United States Federal Courts refer to as a “fresh start,” or what our office commonly refers to as regaining financial control.
Our firm was established with the very purpose of assisting Massachusetts families and individuals who face overwhelming debt.
At the Law offices of Michael T. Eramo and Associates, we understand that honest people sometimes find themselves overburdened with debt they cannot pay. Over the years, we have had the opportunity to talk to and provide legal counsel to thousands of clients throughout Massachusetts. From the initial consultation until the discharge of debt has been granted, our legal team is exceptionally well educated, trained and committed to serving the needs of all our clients.
Whether a client needs to file a chapter 7 petition, a chapter 13 petition, or is facing foreclosure, tax issues, wage garnishment or a pending lawsuit, we may be able to help. If you are honest, overwhelmed with debt, and looking for a fresh start, call us and begin the process of regaining your financial control.
Frequently Asked Bankruptcy Questions
I understand the Federal Bankruptcy Laws dramatically changed October 17th, 2005. How does the law change affect me?
It is important to speak with a qualified bankruptcy lawyer. The new laws are complex and knowledge of the new rules is required. Bankruptcy is still an available option for most, if not all, honest individuals facing overwhelming debt or foreclosure.
What is bankruptcy?
Bankruptcy is a legal proceeding under Federal law where a person is released from paying debts by declaring bankruptcy and turning all non-exempt property over to the court’s Trustee.
Who can file bankruptcy?
Any person who resides in, does business in, or has property in this country can file bankruptcy.
Should I stop paying creditors once I decide to file for bankruptcy?
Yes. Debts that can be discharged in bankruptcy such as credit card and medical obligations, should not be paid once an informed decision is made to file a Chapter 7 petition. Monthly bills such as rent, mortgage payments, telephone, and utilities, however, still must be paid.
Will filing for bankruptcy stop harassing phone calls from bill collectors?
When you file either kind of bankruptcy, something called an “automatic stay” goes into effect. The automatic stay prohibits virtually all creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.
How long does a bankruptcy remain on my credit report?
The fact that an individual filed a bankruptcy can remain on the credit report no longer than 10 years under provisions of the Fair Credit Reporting Act.
How much does it cost to file?
In Massachusetts, the filing fee is $299.00 for individual, joint and business petitions under Chapter 7, or $274.00 for Chapter 13.
What is the difference between Chapter 7 and Chapter 13?
In Chapter 13, the debtor pays a portion of non-secured debt and all of the secured and priority debt over a period of 3 to 5 years. The debtor is allowed to keep both exempt and non-exempt property. In Chapter 7, the debtor is not required to pay any dischargeable, debt and is not allowed to keep any non-exempt property. Whether to file under Chapter 7 or Chapter 13 should be discussed with an attorney.
Where is a bankruptcy filed?
A bankruptcy petition is filed in the United States District Court in the district where the debtor lives or does business.
How long does it take?
Chapter 7′s are generally very fast. The court will schedule a creditor’s meeting in approximately 30 days after the bankruptcy petition has been filed. At the meeting, the trustee will ask you about the information contained in your bankruptcy schedules. The meeting may last only a few minutes, and is generally the only “court” appearance you will have to make. In approximately 120 days you will receive your discharge and the final decree will follow a few weeks later. Chapter 13′s and 11′s take longer. Your attorney can give you a rough estimate of the time involved.
What do I need for the initial meeting with my attorney?
Clients should bring in these four things: 1) a list of assets and liabilities, 2) a list of creditors showing the amount due to each creditor, 3) a list of income and expenses, and 4) last two years tax returns. We will discuss your financial situation and determine if bankruptcy is appropriate. If it looks like bankruptcy is appropriate, I will provide you with forms to fill out. When this is complete, the petition and schedules will be prepared and filed. 5) Evidence of last 6 months of income.
I am in debt because I’ve been irresponsible in using credit. Will I be denied a debt discharge because I don’t have a good excuse for my behavior?
No. The bankruptcy system does not ask whether your debt is due to unforeseen circumstances that were no fault of your own, or whether you were living “over your head.”
What does the term “fresh start” mean in association with bankruptcy?
By discharging your debts in a Chapter 7 bankruptcy you can receive a “fresh start”, and move on to rebuild your financial and personal life, without the worry of being overwhelmed by an unbearable load of debt.
Is my primary residence protected?
In Massachusetts, if you own your own home and it serves as your principle residence, you may be able to protect it against the claims of creditors and/or a forced sale by filing a Declaration of Homestead . Speak with a qualified bankruptcy attorney to determine the status of your Homestead Exemption should you file bancruptcy.
Will I lose my job?
No. Bankruptcy laws prohibit discrimination based upon a debtor filing for protection under the bankruptcy laws.
Can I go to jail if I file bankruptcy?
No. There are no debtor’s prisons in the United States.
Will bankruptcy stop a wage attachment?
Will bankruptcy stop a judgment?
Possibly. Most civil judgments are stopped by bankruptcy.
Will bankruptcy wipe out all my debts?
Yes, with some exceptions. Bankruptcy will not normally wipe out: (1) money owed for child support or alimony, fines, and some taxes; (2) debts not listed on your bankruptcy petition; (3) loans you received by knowingly providing false information to a creditor who reasonably relied on it in making you the loan; (4) debts resulting from “willful and malicious” harm; (5) student loans owed to a school or government body, except if: the loan first became due more than 7 years before the bankruptcy was filed or; the court decides that payment would be an undue hardship; (6) mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).
Will I have to appear in Court?
In most bankruptcy cases, you only have to go to a proceeding called the “Meeting of Creditors” to meet with a bankruptcy trustee and any creditor who chooses to come. This meeting is usually a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. Upon the filing of a Chapter 7 petition, a Meeting of Creditors is scheduled by the Court, which takes place one to two months after the petition is filed. If the petitioner is represented by counsel, the attorney will sit with the petitioner and provide assistance when needed. The trustee will tape record this meeting as he/she swears in the debtor. He/she will ask if the debtor read the petition before signing it, and if the signature on the petition belongs to the debtor. Additional questions such as the following may be asked: 1) How did you get into financial trouble? 2) During what period of time were your debts accrued? 3) How did you value your house (if applicable)? 4) Do you have the right to sue anybody? 5) Does anyone owe you money? 6) Do you expect to receive any moneys in the near future from tax returns, inheritance, or any other source? 7) Have you transferred any real or personal property to others within the last year? These questions are designed to help the trustee determine if the debtor possesses assets that can be distributed to creditors, and if the debtor is honest in filing the petition in good faith. Creditors may also appear at the meeting to ask questions, but this rarely happens. The Meeting of Creditors usually takes no more than five minutes to complete.
What happens after the Meeting of Creditors?
In “no asset” cases (the usual Chapter 7 where all assets are exempt), a few months after the Meeting of Creditors, the Court will grant a discharge. At this point the case ends with the debtor free and clear of dischargeable obligations listed in the petition.
Can I use bankruptcy to stop a foreclosure?
Yes, but there are limitations to this strategy. A chapter 7 will only delay a foreclosure for a short while until the creditor is able to file a motion for relief from the bankruptcy stay. Unless you are able to cure the default within a month or so of the bankruptcy, filing a chapter 7 probably won’t do you much good. A chapter 13 will allow you to pay the past due mortgage payments over a period of 3 years but you must still be able to make the regular monthly payments. If you can’t do this, a chapter 13 probably won’t work.
Can I discharge my student loans?
Until recently, student loans were dischargeable for undue hardship or if payments were due for at least 7 years. A late 1998 amendment to the bankruptcy code has eliminated the 7 year discharge provision entirely. Now student loans are not dischargeable except for undue hardship. If you can convince a judge that having to pay the student loan would impose an undue hardship on your ability to get a fresh start, the judge can order that the student loan debt be discharged. This is not an easy thing to do since most people can pay their student loans once their credit card debt, medical bills, etc. are discharged.
Can I discharge child support?
What is a reaffirmation agreement?
A reaffirmation agreement is simply an agreement to pay a debt that existed at the time you filed bankruptcy. Usually debtors are willing to enter into reaffirmation agreements on secured debts such as homes and automobiles. Most credit cards, medical bills and other debts are “unsecured” and debtors generally don’t enter into reaffirmation agreements on those kinds of debts. Typically, the creditor provides your bankruptcy attorney with a reaffirmation agreement for your review and signature. The one big downside to reaffirmation agreements is that you remain personally liable for the debt. If you later default on your payments you could lose the property and become personally liable for any deficiency. Obviously, you will need to give careful consideration to your ability to make the payments and the potential consequences of a default. The bottom line: If you don’t need the property and can’t make the payments don’t enter into a reaffirmation agreement.
What are the federal exemptions?
The federal exemptions can be found at 11 U.S.C. ß 522. There are numerous exemptions, but the most important and widely used ones are as follows: (Note: The federal exemption amounts listed below were adjusted on April 1, 2001 pursuant to 11 U.S.C. ß104. You will need to double these amounts for married couples filing jointly). (d)(1) Homestead – $18,450.00 (d)(2) Motor vehicle – $2,950.00 (d)(3) Household goods – $9,850.00 (d)(4) Jewelry – $1,225.00 (d)(5) Wildcard (unused homestead) – $9,250.00 (d)(6) Tools of the trade – $1,850.00 (d)(8) Loan value of any life insurance – $9,850.00 (11)(D) Personal injury award – $18,450.00 There are other exemption for retirement accounts, health aids, etc., but these are the most commonly used exemptions with values that most people need to be concerned about. The selection of exemptions can be very tricky and your attorney will help you decide whether you should select the state exemptions or the federal exemptions for your particular bankruptcy.
What can be done about judgment liens?
A judgment lien is a lien obtained as a result of a money judgment and recorded against property such as a house or a car. If the lien applies to exempt property, it may be eliminated. To avoid a judgment lien, a motion must be filed in addition to the Chapter 7 petition. Liens related to child and spousal support judgments may not be avoided.
What do we do if someone in bankruptcy owes us money?
In a chapter 7 no-asset case do not file a claim unless requested to do so by the court. In a chapter 7 asset case you will receive a claim form, and a notice, setting a date to file the claim. In a chapter 13 case, a proof of claim must be filed within 90 days of the 341 meeting date.