Ways You Can Repay Your Federal Student Loans

Americans owe over $1.48 trillion in student loan debt, spread out among about 44 million borrowers. Recent estimates put that at about $620 billion more than the total U.S. credit card debt. The average Class of 2016 graduate has $37,172 in student loan debt, up six percent from the previous year. 

As you may already know, it it can be very difficult to discharge any student loan debt in a bankruptcy proceeding. I always review that as an option for my clients with student loan debts. But you generally have to have a disability or some other condition that makes it very difficult for you to earn income before you can discharge any student loan debts in bankruptcy (at least in the Minnesota District - standards vary in other bankruptcy Districts in the U.S.).

So what can you do if you are overwhelmed with student loan debt?

Repayment Options

Currently, the Department of Education offers four income-driven repayment plans to borrowers who qualify.

1. Income-Based Repayment (IBR)

To qualify for IBR, your prospective payments must be lower than they’d be on the Standard Repayment Plan. You also must demonstrate financial need based on your income. If your student loan debt is higher than your annual discretionary income or is a significant portion of your annual income, you should qualify. Payments are generally 10 to 15 percent of your discretionary income with a 20-25 year repayment period (depending on when you first took the loans).*

Eligible loans include Direct Loans, Direct PLUS Loans made to graduate students, Federal Stafford Loans, and some Family Education Loans. Older Perkins loans might also be considered.

The advantage to IBR is that is lowers your monthly payments and your loans will be eligible for forgiveness if you still have a balance at the end of the repayment period.

2. Pay As You Earn (PAYE)

Pay As You Earn plans also require that your prospective payments be lower than they would be on the Standard Repayment Plan. But they can offer better terms that IBR, with payments closer to 10 percent of your discretionary income, and forgiveness of remaining principal after 20 years of payments.

The catch is you must be a relatively new borrower. Your first loan must have originated no earlier than October 1, 2007, and you must have received a disbursement of a Direct Loan on or after October 1, 2011.

3. Revised Pay As You Earn (RPAYE)

RPAYE is the newest type of repayment plan; it became available on December 1, 2015. As the name suggests, RPAYE is similar to Pay As You Earn plans, with two key differences: (1) you can qualify even if your first loan was before October 1, 2007, and (2) there is a "financial need" test under PAYE that you do not need to satisfy to qualify for RPAYE. Thus, RPAYE will be available to more borrowers.

RPAYE repayment terms are normally 10 percent of discretionary income for 20-25 years (the 25-year term is primarily for those with graduate or professional student loans). And your spouse's income is taken into consideration to determine what you can afford to pay.

4. Income-Contingent Repayment (ICR)

Like RPAYE, Income-Contingent Repayment plans do not have an income eligibility requirement. ICR plans can also include some parental loans if they were consolidated.

Normally, ICR plans have the broadest scope. If you do not qualify for one of the other repayment plans, you might still qualify for ICR. But the repayment terms are not as good: generally 20 percent of discretionary income with a 25 year term. Also, there are some stricter loan forgiveness rules under ICR.

Which Plan Is Right For You, IF ANY?

You can start with the tools available at StudentLoans.gov (look for the "Repayment & Consolidation" tab). Some things to consider before starting a plan: (1) the kinds of loans you have must fit within the eligible categories, (2) you might end up having to pay taxes on the forgiven amount at the end of the plan - assuming current tax laws do not change before then, and (3) you might end up paying more in interest than you would if you kept making the standard payment amount.

But if you qualify for a repayment plan, it can often make a very difficult situation much more manageable.

*In general, your "discretionary income" under any repayment plan referenced in this article is equal to the difference between your annual income and 100% of the federal poverty guideline for your family size and State of residence.

About the author: Dan Cooke

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What Happens to My Student Loans in Bankruptcy?

Current U.S. laws do not allow most student loans to be discharged in bankruptcy. So what can you do to deal with them? And what, if anything, happens to them if you do file for bankruptcy protection?

It mainly depends on what kind of bankruptcy you file: Chapter 7 or Chapter 13.

Chapter 13

Chapter 13 is sometimes called a "reorganization" or payment plan bankruptcy, where you agree to pay back at least part of your debts over time. Some of your debts will get better treatment than others and can be paid in full, such as priority income tax debts. Student loans are normally classified as "nonpriority unsecured debt", which means they're treated just like credit card debt and do not have to be paid in full. This means that you are not required to pay off your student loans in a Chapter 13. The bad news is that while any remaining balances on other debts, like credit cards, can be discharged at the end of a Chapter 13, your student loans are not. And the interest keeps accruing on the student loans during your bankruptcy case.

So while you may gain significant relief on your other debts in a Chapter 13, you'll likely finish your Chapter 13 payment plan with student loan debts that are similar in size to when you started.

This all probably sounds pretty bad. But Chapter 13 can still be helpful to folks with student loans. You can use Chapter 13 to buy yourself time to take care of other debts, and then focus on what to do about any remaining student loan debt afterwards. There are various income-based repayment programs available - call my office if you'd like to learn more about them.

Chapter 7

What about Chapter 7? In a Chapter 7 case, your student loans will not be discharged unless you file a separate Complaint to Determine Dischargability, where you're essentially asking the bankruptcy judge to eliminate your student loans, in part or in total, due to an "undue hardship." The lender (or its guarantor) will almost always object. The U.S. Department of Education has written a letter telling lenders exactly how they can object. This means you're likely in for a full-blown trial in front of a bankruptcy judge. 

Most of the time it boils down to showing that you are so impoverished and so deep in student loan debt that it would be impossible for you to pay your student loans off while maintaining a minimal standard of living. It's a tough thing to prove but there are cases where relief has been granted. If you can see no way to pay off your student loans over the next 10-20 years, give us a call. We can assess your situation for free and discuss your options.

Image credit: Bossi

Avoiding "Perpetual" Bankruptcy after College

Here's a scary story for you. "Phil" (not his real name) graduated with honors from a four-year university with $82,000 in public and private student loan debts. He found work in his field - and took on additional part-time work - but what he made wasn't enough to meet everyday expenses and pay off his student loans. Phil isn't a doctor or a computer programmer and wages in his field are slightly lower than the average wages in his area. But he found the work that best suited his skills and was a contributing member of society. He just couldn't afford to pay as much as his student loan lenders were demanding.

A couple of years later, one of Phil's private student loan lenders decided to sue and garnish Phil's wages. Left with the choice of not eating or not paying rent each month, Phil filed for Chapter 13 bankrutpcy relief, which lowered the monthly payment on his student loans and left him with just enough money to meet his other living expenses.

The bankruptcy helped. But when the payment plan ended, Phil still had lots of unpaid student loan debt left to go, some of it with very high interest rates. He tried various settlement options but found that the only solution was to file for bankruptcy relief again.

This is sometimes called "perpetual bankruptcy" and it is unfortunately all too real. 

Until the laws change to provide some more meaningful relief for honest, hard-working debtors who cannot afford their student loan payments (particularly the often more burdensome private loans), there is really only one commonsense approach to the problem: budgeting for the future student loan expenses before borrowing.

This means students and their families need to do some serious financial planning before signing the loan documents. There are options beyond simply borrowing the "sticker price" tuition rate offered by the school. One interesting program is the Loan Repayment Assistance Program, which works directly with a number of colleges and universities to help repay student loans for lower-income participants.

Shop around and budget for those future expenses. Otherwise, the only other alternative may be perpetual bankruptcy.

About the author: Dan Cooke

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Got Student Loans? Beware a Newly Exposed Payoff Pitfall.

Part of our government's response to the massive 2008 economic collapse (aside from the massive bailouts) was to pass new financial industry regulations to try and prevent another collapse. This included the creation of the "Consumer Finance and Protection Bureau," which is in essence a watchdog for big banks and other lenders.

The CFPB has a Student Loan Ombudsman who recently wrote an "Annual Report" that reviews a large number of complaints they have received over the past year. Guess what they found? Student loan payments aren't always being processed properly. Instead of applying additional payments towards principal reduction (as is often requried with other loans, such as mortgages) some banks are escrowing those funds as "advance payments" toward future month's bills. The result? Honest borrowers end up paying more to settle their student loans.

So the private student loan banks are applying payments in confusing ways so they can make more money? What a shocker. 

The takeaway? Take advantage of the government's attempt to help and use the resources provided to you by the CFPB to learn more about how to pay off your student loans as efficiently and as quickly as possible. And be sure to file a complaint when something goes wrong.

If you're still left with questions about your student loans, call us. We can go over your options with you.

About the author: Dan Cooke

Image credit: Bossi