Student loan debt is skyrocketing—the latest figures put student loan debt at $1.2 trillion dollars. As the cost of education continues to rise, more and more consumers are dealing with higher amounts of student loan debt.
The good news is that there are options for dealing with student loans. Even if a student loan is in default (and with a debt collector), borrowers with federal student loans can rehabilitate the loan.
Know Your Loans
The first step in evaluating your options for student loans is to determine what kind of loans you have. There are major differences between federally backed student loans, and private loans.
In general, federally backed student loans provide borrowers with certain rights and options. Those rights can vary slightly depending on the exact type of federal loan, but in general, the rights and options are fairly consistent.
Private loans, however, are dependent on the terms of the original contract. Every bank and and every issuer is different, and even loans from the same bank may have different terms.
A great place to start is the National Student Loan Database. The database will show you every federally backed student loan, the balance, and the current status. If a loan is not listed in the database, that likely means it is a private student loan.
Know Your Options
First and foremost, there are two important things to know about student loans. One, you can discharge them in bankruptcy. However, it is very difficult to do so, and many bankruptcy attorneys will not even attempt to include student loans in a bankruptcy. Some bankruptcy attorneys will recommend a Chapter 13 bankruptcy, which can help manage student loan debt. But as a general rule, it is very difficult to discharge student loans in bankruptcy.
Two, there is no statute of limitations for federally backed student loans (the statute of limitations for private loans varies on the terms of the loan, among other issues). In other words, the majority of borrowers will not be able to avoid repayment through bankruptcy, or waiting for the statute of limitations to expire.
The options for federally backed student loans depends on the status of the loans. If the loans are not yet in default (which is defined as 270 consecutive days of non-payment), there are variety of repayment options, along with deferment and forbearance.
Discharge of student loans
There are a number of options for requesting discharge of a student loan. If the borrower dies, the loans can be discharged upon presenting a death certificate to the current loan servicer. If the loan is a Parent PLUS loan, if the student passes away, the parents can apply for total discharge.
If the borrower becomes permanently disabled, the borrower can apply for discharge. There are a number of requirements to meet, but this can be a great option for some borrowers.
There are a few other ways to get a federal loan discharged. If the school you are attending closes before you complete your program, you can apply for discharge. If a school falsely certifies your eligibility for a loan (there are a variety of ways to do this), you can also apply for discharge.
The public loan forgiveness program is a great option for borrowers that work in a certain public service positions. Under this program, after making 120 payments on your loans (under an eligible repayment plan), the remaining balance can be discharged.
Deferment and Repayment Plans
Forebearances and deferment are typically granted when a borrower is facing financial hardship, is unable to find suitable employment, etc. One thing to remember about both of these options, however, is that they are usually temporary.
That said, there are a variety of repayment plans that take into account a borrower’s income. The Income-Based Repayment Plan and Income Contingent Plan both determine payments based on the borrower’s overall financial situation.
Under both plans, the payment amounts will likely change as the borrower’s finances change, but they at least provide flexibility for tight finances. They also provide for a maximum repayment time period of 25 years. If the loans are not paid off by that point, the remaining debt is forgiven (but be wary of tax implications).
The downside with these repayment options is that over time, borrowers will pay much more in accumulated interest versus a standard 10-year repayment plan.
What happens if you default on your loans
As noted above, federally backed student loans are considered in default status after 270 days of consecutive non-payment.
At that point, the Department of Education typically hands off the account to a debt collector. The Department of Education contracts with 23 private companies that collect defaulted student loans.
Once your loans are defaulted, lots of bad things happen. One, you lose the ability to enter into a repayment plan (discussed above) and you cannot request forebearance or deferment. Two, the Department of Education also reports student loans to the credit bureaus, so your loans will likely be reported as in default status.
Three, once loans are in default status and placed with a collection agency, the Department of Education can add a collection fee of up to 25% of the principal, interest, and fees already due and owing. On top of that, the collection agency can charge a commission of 25% or more.
Lastly, federally backed student loans can be collected through the use of income tax refund captures and administrative wage garnishment of up to 15% of your wages. Borrowers will get notice before either occurs, but a judgment is not required for either step.
In other words: if your loans are in default, things will go from bad to worse.
The one-time get out of default option
If you’ve been to In-n-Out Burger, you know that you can order items that aren’t listed on the menu (animal fries and protein style come to mind).
Rehabilitation is like ordering off the menu. Rehabilitation is a one-time, make-it-right type of option. Rehabilitation is nine (9) voluntary, reasonable, and affordable monthly payments during ten consecutive months. The payment amount is based on the totality of the borrower’s financial situation. It is important to remember, however, that this is amount that both sides have to agree on, it is not a predetermined amount.
Once a rehab plan is completed, the loan is no longer considered in default (and no longer reported that way), and borrowers have the full range of options available to them again.
Many debt collectors will not bring up rehabilitation (rehab) as an option, because they receive a lower commission for getting borrowers into a rehab plan. Other times, when asked about a rehab amount, some debt collectors will quote a number that has allegedly been provided to them by the Department of Education. When pushed, however, many debt collectors will present a much lower rehab amount after learning of the borrower’s financial circumstances.
Most debt collectors receive a certain commission percentage that depends on the amount of money that they collect—which means they want the rehab amount to be as high as possible.
When to contact me
If your loans are in default and you are being contacted by a debt collector, I may be able to help. If you are thinking about changing your repayment plan, it can helpful to sit down and discuss the various options.
As detailed above, student loan debt is different from other consumer debt, which means it’s a good idea to contact an attorney that frequently deals with student loan debt (like me).