Chapter 19 Student Loans

Why you should pay particular attention to your student loans Because most student loans are government loans, it is the government who will come after you if you don’t pay. Private loans can be very tempting given the soaring costs of higher education. However, you should be careful if you are considering private loans to finance higher education. It is important to identify what kind of student loan you have.

The first step is to identify what kind of loan you have Direct and FFEL Loans Direct loans are straight from the government. Since 2010, nearly all new federal student loans are Direct Loans. These loans are made directly from the federal government to borrowers, with the assistance of the school. Before 2010, many students loans were made under the Federal Family Education Loan (FFEL) program. FFELs were given out by banks or other financial institutions, guaranteed by state guarantee agencies, and ultimately back by the U.S.

Types of Student Loans Both Direct and FFEL loans can be any of the following types: Stafford Loans PLUS Loans Consolidation Loans Perkins Loans are made directly from the school you attended (generally have lower interest rates). How to identify what type of loan you have- Department of Education’s National Student loan Data system (NSLDS) www.nslds.ed.gov or 800-4-FED-AID If you find your loan on this website, it is probably a government student loan.

How to figure out if you have a federal government or private loan If your loan is not listed in National Student Loan Data System (NSLDS), it is probably not a federal government loan. Truth in Lending Act - when you take out a private loan, you should be given a disclosure statement that looks like the statement you get when you take out a car loan. Most private loans are covered by the Federal Truth in Lending Act, while federal loans are not. Interest rates on federal loans are set by law. With the exception of PLUS loan, the federal loan program do not require borrows to pass credit checks in order to qualify. [Private loans do require you to get a co-signer.]

What to do if you are behind on your student loan It is very important to figure out whether your loan is a government loan or a private loan. You have many more choices if you deal with student loan problems before going into default. You usually have 9 months for federal government loans after you first get into trouble before your loan will go into default.

Student loan cancellation The following are some ways in which student loans can be cancelled: Closed School Cancellation - You can cancel your loan if your school closed while you were still enrolled or within 120 days of your leaving the school. Disability Cancellation – You can cancel your loan if you are permanently and totally disabled. Parents with PLUS loans may apply for discharge based on their own disabilities, not those of their children. Death Cancellation – Your government loans will not survive your death. Your estate will not have to pay back your student loans. Cancellation for certain relatives of September 11 victims

Job-related and military service cancellations There are programs that will fully or partially cancel student loans for borrowers who work for a certain amount of time in certain professions. Teachers Perkins loans borrowers Military service Public service cancellation

Cancellation after a period of repayment Borrowers making constant payments through qualified repayment plans are eligible to cancel their remaining balances. If you continue making qualified payments under the income-based or income-contingent plans for twenty-five years, any debt that remains after that period is canceled. [Borrowers have to make payments for twenty-five years]. Under new repayment plans offered now (after July 1, 2014), you may be able to cancel your loan after 20 years of payments.

Bankruptcy It is generally very difficult, but not impossible, to discharge a government student loan in bankruptcy. The only basis for doing this is to convince the bankruptcy judge that it will be significant hardship for the foreseeable future to repay the loan. This is called “undue hardship.”

How to delay or reduce payment on your student loan Deferments – A loan deferment means that you delay repaying your loan, usually for a year, sometime longer. Once you receive a deferment, you can renew the deferment for one or two or sometimes even three additional years. It is essential to apply for a deferment as early as possible. If you wait too long and get too far behind on your payments, you will no longer qualify for a deferment. Deferments are not available if you are already in default. For subsidized loans, the government makes interest payments for you during the deferment period. But, for un-subsidized or PLUS loans, you will later have to pay back the interest that accrued during the deferment period.

How to delay or reduce payment on your student loan Forbearances – If you cannot qualify for a deferment, an alternative is to request loan forbearance. Forbearance means that you do not have to pay for a while, and no adverse action will be taken against you during the forbearance period. Unlike a deferment on a subsidized loan, the government does not pay interest for you. You will eventually have to repay the full loan amount and all accrued interest. Forbearance is good when you have hardship. Forbearance is a temporary reduction if you lost your jobs, or suffered from a disaster or from illness that increased your health care costs.

4 different repayment plans based upon income and family size Pay As You Earn (PAYE) – the newest, and often best choice for many borrowers Income-Based Repayment (IBR) – applies to FFEL and Direct Loans, and best choice if you do not qualify for PAYE Income-Contingent Repayment (ICR) – has been largely replayed by IBR and PAYE, but still best for a few borrowers with Parent PLUS loans Income-Sensitive Repayment (ISR) – applies only to FFEL loans, is less important because no new FFEL loans were written after July 1 2010 and IBR is more favorable for borrowers.

What to expect if you are in default on your federal government student loan 1) Denial of new student loans and grants –If you are in default, the government can deny you new student loans and grants. 2) Your credit report – Most student loan defaults will show up on your credit report. Most defaults will remain on your report for up to 7 years. Perkins loans may be reported indefinitely. 3) Aggressive collection agency contact –The government and other loan holders hire debt collectors to do most student loan collection work. 4) Collection fees – A large portion of anything you pay to a collection agency on the loan will go to collection agency fees and not to pay off your loans. 5) Tax refund intercepts – If you are in default on your student loan, the government can take your tax refund, including any earned income tax credit you are owed. 6) Wage garnishment – Student loan collectors have the right to garnish a certain amount of your wages without first obtaining a court judgment. [Lesser of 15% of disposable pay]

Getting out of default on your student loans The first question to ask is why you want to get out of default. One good reason is if you want to get financial assistance to go back to school. The last thing you want to do is to take on new debt that you may also have trouble repaying. Another reason to get out of default might be to avoid the government’s aggressive collection tactics. If the reason is because of government collection, you should figure out whether you are truly in danger.

Loan consolidation and rehabilitation Loan Consolidation-you are eligible to consolidate with the Direct Loan program as long as you have at least one FFEL or Direct Loan. Loan Rehabilitation-you can renew eligibility for new loans/grants and cure the loan default by “rehabilitating” a defaulted loan. Direct and FFELs- you are required to make 9 voluntary payments within 20 days of the due date during a period of 10 consecutive months. The rules are different for Perkins Loans. After successful loan rehabilitation, the default notation is removed from your credit report.

Pros and Cons of consolidation and rehabilitation It helps you to extend the repayment term. This is faster than rehabilitation. Credit report will have a notation that you had a defaulted loan paid in full. If you are close to paying off your student loans, it may not be worth to consolidate. Rehabilitation The default notation on your credit report is removed. Other negative information stays on your credit report until obsolete. If you have multiple loans, you have to rehabilitate each loan.

More help with student loan problems National Consumer Law Center (NCLC) Student Loan Law—book Student Loan Borrower Assistance Project www.studentloanborrowerassistance.org Department of Education www.ed.gov Downloads Funding Education Beyond High School Your federal Student Loans: Learn the Basics and Manage Your Debt StudentAid.ed.gov www.ombudsman.ed.gov or 877-557-2575