Understanding Student Loan Debt

Understanding Student Loan Debt
  • Student loan debt can be much harder to find a solution to than other unsecured debts.
  • Federal student loans have a number of payment plans, including ones that are based on your income.
  • Student loans are difficult to discharge in a bankruptcy, so creditors have strong leverage against you.

Student loans – what makes them different

Student loans are unique because what they finance – an education – can’t be repossessed for non-payment. Student debt is heavily regulated by the federal government, which has an interest in promoting education while also protecting taxpayers. This makes dealing with excess debt a bit complicated.

Types of student debt

There are many types of student funding, from government-subsidized loans to private financing to loans for parents, and they have various eligibility and repayment requirements. Here are the most common:

  • Stafford – Stafford loans are the most popular student loans. They are backed by the federal government, which means taxpayers pick up the tab if you fail to repay your lender, and then the government pursues you for the unpaid balance. Stafford loans come in two forms -- subsidized, need-based financing and non-subsidized advances. Interest rates and fees are set by the government.
  • Perkins – This low-interest plan for low-income students expired and was extended through 2017. However, no new loans are being granted. There are repayment plans and assistance available to borrowers having difficulty with their existing loans.
  • PLUS – Funded by the US Department of Education, PLUS loans are offered to eligible graduate and professional students as well as parent of students enrolled at least half-time. For parent loans, payments are based on parental income, even if it’s the student making the payments. Students with poor credit can have co-signers.
  • Private—While federal student loans have set fees and rates, private loan costs depend on the lender, your credit rating and income. There are fewer consumer protections associated with private student loans, but it is also harder for private lenders to collect from defaulting borrowers.
  • Health Profession – Health Professions Student Loans are need-based programs offering low-interest-rate financing to full-time, financially disadvantaged students pursuing degrees in dentistry, optometry, pharmacy, podiatric medicine, or veterinary medicine.

Getting help for student loans

According to The Wall Street Journal, over 40 percent of student loan borrowers have trouble making their payments. If you’re among them, you do have options. First, try restructuring federal loans to an income-based plan. If your income is too low to realistically make payments, your required payment can actually drop to zero. If you don’t qualify for income-based repayment, or you have private student loans, look further:

  • Forbearance / Deferment – If your financial difficulties are temporary, you can request a forbearance or deferment from your lender, which allows you to temporarily suspend repayment until you can afford it. Note that you’re still responsible for paying interest on your loan during this time. Deferment requests for federal loans are automatically granted if you’re still enrolled in school, and if you have subsidized Stafford loans, the government pays your interest as long as your loan is deferred.
  • Rehabilitation – If you’re already in default on a federal student loan, don’t be discouraged. You can get your loan out of default by agreeing in writing to make nine consecutive monthly payments within 20 days of their due dates. Your payment may be recalculated by the agency you owe, and can be as low as $5.
  • Standardized Compromise and Write-off – This is similar to debt settlement, but it applies to federal debt. It’s not easy to get. Compromise and write-off is an agreement by the agency guaranteeing the loan to accept less than the amount due as payment in full. Collection costs and up to 30 percent of the balance can be waived. You may also owe taxes on the amounts forgiven.
  • Settlement – Private lenders have less recourse than the federal government, and you may have better luck settling with them. You’ll need to come up with a substantial lump sum, and forgiven debt is considered taxable income to you.
  • Bankruptcy (Brunner Test) – For most people, discharging student loans in bankruptcy is not legally an option. However, if you can prove that repaying your loan would cause “undue hardship,” you may be allowed to discharge your student debt. Bankruptcy courts differ in their definition of “undue hardship,” but many use the Brunner Test to determine your status. The Brunner test examines three elements – if repaying your student loans would cause you to live in poverty, and if this condition is not temporary, and if you’ve made a good faith attempt to pay your loans, you may be allowed to discharge them.
  • Other Defenses – If the school you attended didn’t deliver on its promises – if you attended one of the for-profit schools recently shut down by government agencies, for instance – you may be able to discharge your debt due to breach of contract, unfair or deceptive business practices, or fraud. A lawyer can help you with this.
  • Forgiveness – Depending on your circumstances, you may be able to get your loan balances Some programs allow you to discharge loans if you take jobs in public service or teach in needy areas. Other discharges are allowed if your school closed before you obtained your degree, if you become permanently and totally disabled, or if you were ineligible for your loan to begin with.

If you’re overwhelmed by student loan debt, you might feel as though you’re between a rock and a hard place. However, there is private assistance and government help available if you know where to look.

Student loan repayment options

If you (like most students) have federally-backed student loans, you’re required to choose a repayment plan. If you don’t choose for yourself, the default plan is the Standard Repayment Plan, which pays off your balance in 10 years.

  • Restructure -- You can change plans to accommodate your situation at any time. While the Standard Repayment Plan retires the debt faster and with the least amount of interest, it’s not affordable for everyone. Other options include:
    • Graduated Repayment Plan, with lower initial payments that increase over time
    • Extended Repayment Plan, which lowers the monthly payment by increasing the term to as much as 25 years
    • Pay As You Earn Plan and Revised Pay As You Earn Plan, which set your payment at ten percent of your discretionary income
    • Income Based Repayment Plan, with payments at ten or 15 percent of your discretionary income
    • Income-Sensitive Repayment Plan, which discretionary income
    • Income Contingent Repayment Plan, with payments at 20 percent of discretionary income or fixed to repay the loan in 12 years – the lower of the two payments applies

Not every student is eligible for every option. It’s worth noting that many of these options forgive the remaining loan balance after 20 or 25 years.

    • Private Refinance – If you have a stable job and very good credit, you may be able to refinance and reduce your interest rate and / or your payment with a student loan refinance. This is especially true if you have private loans with higher rates, or if your income is high enough to preclude taking advantage of income-driven federal student loan repayment plans.
    Because these programs are offered by private lenders, rates, fees and terms are not set by the government. You are responsible for comparing fixed and variable loan offers from competing providers and choosing what’s right for you.
    • Federal Consolidation – While private loans can be consolidated with private refinance programs, consolidating federal and private loans together causes you to lose the advantages of federal loans – income-driven repayment, forbearance and forgiveness. Consolidating federal loans separately lets you retain those benefits.
    Federal loan consolidation can reduce your payment by extending the repayment term. If one or more of your federal student loans is in default, consolidating your loans into a new one gets it out of default. If you have a co-signer, consolidating to a new loan releases your co-signer (assuming that you can qualify for the new loan without a co-signer).  

How to avoid excess student debt

The best way to stay out of trouble with student loans is to avoid excess borrowing – just because the average college student graduates with $30,000 in loans doesn’t mean you have to. Here are some tips to minimize debt when you go to college:

  • Start at a junior college. Community colleges are much less expensive than four-year schools, and your degree won’t be any different because you transferred in later.
  • Go for grants. According to The College Board, the average undergrad in 2015 received over $8,000 in grants. That’s free money.
  • Work part-time to cover some costs instead of financing them.
  • Speed things up – night classes, summer school, substitute an extra class for social time – and save by graduating early.
  • Choose your school and major carefully. If you have to finance your future, treat it like the investment it is. Evaluate your school and degree by how quickly you’ll be able to pay off its cost.