Dealing with Student Loan Debt

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Determining what type of loans you have: Your options for student loans depend on the type of loans you have. If you don’t know, call the Federal Student Aid Information Center at 1-800-4- FED-AID.  The center’s counselors can help you figure out what types of loans you have. It is often hard to tell the difference between private and federal loans.  The lender may be the same.

Private Loans:  You may be put into default as soon as one payment is missed.  If you are in default, contact the lender. Ask the lender to modify the loan or repayment agreement.  Modification could include an interest rate reduction. Be aware that private lenders are not required to offer flexible repayment, cancellation or deferment options.

Federal Loans:  You are in default for most federal loans if you have not made payments for nine (9) months.  The entire loan balance is due once you default.
 
If you are in default, you may be able to rehabilitate the loan with an affordable payment. The Higher Education Act provides that lenders set reasonable and affordable payments. If a collection agency is demanding a payment amount that is unaffordable, you have options:

 

• Ask to speak with a supervisor or agency ombudsman, if they have one; or
• File a complaint with the loan holder stating that the collector is unwilling to set a reasonable and affordable payment; or
• If your problem is with the Department of Education, call their ombudsman at 877-557-2575 for help in obtaining a reasonable and affordable payment.

If you are not in default, you can ask the loan holder to place your loan in deferment or forbearance.  If you can afford to pay something each month but not the full payment, apply for a more affordable repayment plan.  

To qualify for the income-based repayment plan (IRB), you must show that you have too much debt and too little income.  IRB uses a sliding scale to determine your payment.  If you earn below 150% of the poverty level for your family size, your payment will be $0.  If you earn more, your loan payment will be capped at 15% of whatever you earn above 150% of the poverty level.  This amount will usually be less that 10% of your total income.  You will have to verify your income every year.  Your payment may be adjusted based on changes in income or family size.  

Discharging a student loan:  In general, student loans cannot be discharged in bankruptcy.  There are a few exceptions.

Federal law allows certain borrowers to discharge their student loans in very limited circumstances.  You must fit within one of the categories listed below:

• You did not have a high school diploma or GED at the time of enrollment. The student loan must be from 1986 or later; or
• The school closed while you were enrolled or within 90 days of when you withdrew from the school. The student loan must be from 1986 or later; or
• You did not complete the program, and the school did not properly return part of the loan to the lender. The student loan must be from 1986 or later; or
• You had a status or condition at the time of enrollment that was a legal barrier to employment in the field. The student loan must be from 1986 or later.  Examples include:
  
  • You were in a security guard program or nursing, early childhood or similar program training to work with children or disabled persons but had a felony criminal record.
  • You were in a nursing or custodial maintenance program, but you had a physical or mental disability that prevented you from working in those fields.
  • You did not have a high school diploma AND a high school diploma is necessary to take a license or certification exam that is required for the job.

• The borrower is now deceased or totally and permanently disabled; or
• The borrower’s signature on the loan application was forged.

If you fit into one of these categories, you can begin the process of discharging your loan at the U.S. Department of Education website, www.myeddebt.com.

In circumstances of extreme financial hardship, a student loan may be discharged through bankruptcy.  You must be able to prove that payment of the loan “will impose an undue hardship on your and your dependents.”  Courts use different standards to evaluate whether a borrower has shown undue hardship. It is very difficult to prove.  This is true for both private and federal loans.  Contact a bankruptcy attorney to discuss your options.

Wage Garnishment:  If you fail to pay or make arrangements, the federal government can garnish your wages for federal loans.  The government does not need to seek a judgment in court first. Fifteen percent (15%) of your after tax wages can be garnished. However, your pay cannot be reduced below $217.50 per week.  You must be notified of the garnishment and have an opportunity for a hearing to challenge the amount of the debt and terms of repayment.
For private loans, the lender must sue in court to obtain a judgment.  The lender must follow state garnishment laws.  In Ohio, up to 25% of your after tax wages can be garnished for a student loan. However, your pay cannot be reduced below $217.50 per week.  You must be notified of the garnishment and have an opportunity for a hearing to challenge the amount of the debt and terms of repayment.  To avoid garnishment, contact the private lender or collection agency to work out a payment arrangement.

Tax refund:  The Department of Education may seek to take your federal tax refund if you are in default.  You can avoid this by pursuing one of the options above.

For more information. visit: www.studentloanborrowerassistance.org.

 

This article is meant to give you general information and not specific legal advice.
Prepared by Community Legal Aid Services, Inc. Updated April 2012. CE-16-F085-CLAS