Except in situations were the debtor is able to obtain a “hardship discharge,” student loans are not discharged in bankruptcy. There are steps that a debtor can take, however, outside of bankruptcy to help manage his or her student loan debt.
A. STUDENT LOAN PROGRAMS AND APPLICABLE LAW
There are various federal programs that provide different types of student loans.
1. The William D. Ford Federal Direct Loan Program. Part 685of the Code of Federal Regulations governs loans made pursuant to this program (Direct Loans). Under this program, the Secretary of Education makes loans to enable the student or parents to pay the costs of education. These programs include Federal Direct Stafford/Ford Loans, Federal Direct Unsubsidized Stafford/Ford Loans, the Federal Direct PLUS Program, and the Federal Direct Consolidation LoanProgram. 34 C.F.R. §685.100.
2. The Federal Family Education Loan Program. Part 682 of the Code of Federal Regulations governs loans made under this program (FFEL loans). Under this program, lenders use their own funds to make loans to enable students or parents to pay the costs of education. The loans are then guaranteed by a guaranty agency. The programs include the Federal Stafford Loan Program (Stafford), the Federal Supplemental Loans for Students Program (SLS), the Federal Plus Program (PLUS), and the Federal Consolidation Loan Program. 34 C.F.R. §682.100.
3. Federal Perkins Loan Program. Part 674 of the Code of Federal Regulations governs loans made pursuant to this program (Perkins loans). Under this program, the Secretary of Education makes low-interest loans to financially needy students attending institutions of higher learning. 34 C.F.R. §674.1.
B. REYPAYMENT OPTIONS
Repayment options for student loans depend on the loan program. Be sure to consult the set of regulations that govern the particular type of loan.
1. Standard Repayment. The debtor should make his or her regular monthly payments under the standard repayment schedule, if at all possible. The debtor will pay less interest, avoid refinancing and collection fees, and have his or her student loans paid off sooner. A standard repayment schedule is a maximum of ten years. 34 C.F.R. §682.209(a)(8)(i) [FFEL loans]; 34 C.F.R. 685.208(b)(l) [Direct loans]; 34 C.F.R. §674.33 [Perkins loans].
2. Graduated Repayment Schedule. If the debtor cannot make his or her monthly payments under the standard repayment schedule, one alternative is to refinance into a graduated payment plan. In a graduated payment plan, the debtor’s payments will start out low and increase every couple of years. Some lenders will allow the debtor to pay interest only for a couple of years, and then make regular principal and interest payments. A graduated payment plan may be a good option for a debtor just starting a career and anticipating that his or her income will increase in future years. The term for graduated payment plans depends on the amount of the loan, but can be from ten to twenty-five years for FFEL loans [44 C.F.R. §682.209(a)(8)(i)] and 12 to 30 years for Direct loans [34 C.F.R. §685 .208(d)( 1)].
3. Extended Repayment Schedule. Another option is for the debtor to refinance into an extended payment plan. An extended payment plan permits the debtor to make payments over a period of 10 to 25 years for a FFEL loan [34 C.F.R. §682.209(a)(8)(i)] and 12 to 30 years for a Direct loan [34 C.F.R. §685.208(e)], depending on the loan amount. In an extended payment plan, the debtor’s monthly payment is usually lower than it would be under the standard plan. The downside is that the debtor will pay more interest because the repayment term is longer.
4. Income-Sensitive Repayment Schedule. If the debtor’s income is very low, or if the debtor can’t count on his or her source of income, an “income-based repayment” plan is another option to consider. With an “income based” repayment plan, the debtor’s monthly payments will increase or decrease based on his or her income. With an income based repayment plan, the debtor’s payment will be recalculated each year based on his or her annual income. The maximum term for an income sensitive repayment schedule is 25years. 34 C.F.R.§682.209(7)(viii)[FFEL loans]; 34 C.F.R. §685.209 [Direct loans]. A low income individual may be able to extend the repayment period of a Perkins loan for a period of up to ten additional years. 34 C.F.R. §674.33 (2).
5. Consolidation Loans. The debtor can also “consolidate” his or her student loans into one loan. Repayment terms for consolidation loans may be up to thirty years. 34 C.F.R. §682.209(h)(2)[FFEL loans]; 34 C.F.R. §685.220[Direct Loans]. NOTE: If the debtor consolidates the notes into a single note, they will not be able to discharge a portion of the loan in bankruptcy as a hardship. Either all of the loan will be discharged or none of the loan will be discharged.
6. Alternative Repayment Plan. For Direct loans, there is also a provision for an “alternative repayment” plan for borrowers able to demonstrate that the other payment options are not adequate to accommodate the borrower’s particular circumstances. 34C.F.R. §685.208(l).
7. Hardship Payment Reductions. A borrower with a Perkins loan may be able to reduce the scheduled payments for one year interval(s) if the borrower is not able to make the scheduled repayments due to hardship such as prolonged illness or unemployment. 34 C.F.R. §674.33(c).
C. DEFAULTS AND COLLECTION
1. Collection Fees. Defaulting on student loans is costly. The student loan guarantee agencies may add a “collection fee” of up to 25% to the principal, interest, and penalties that the debtor already owes. In addition, collection agencies may charge a commission of 25% or more. That commission may also be added to the debtor’s outstanding balance. Permissible collection charges for FFEL loans are outlined in 34 C.F.R. §682.203(g), and for Direct Loans in 34 C.F.R. §685.211(d)(2).
2. Tax Refund Intercept. One of the most common methods used by the Department of Education, the guarantee agencies, and collection agencies working for them when collecting student loans if they are in default is to have the IRS intercept the debtor’s tax refund checks. 34 C.F.R. §685.211(d)(3)[Direct loans].
3. Wage Garnishment. Another way common method that the Department of Education and guarantee agencies use to collect defaulted student loans is to garnish the debtor’s wages. Up to ten percent of the debtor’s wages can be garnished, and (unlike other creditors) a student loan creditor does not have to obtain a judgment first. 34 C.F.R. §685.2 1 1(d)(3)[Direct loans].
4. Lawsuits and Reports to Credit Bureaus. The Department of Education also reports defaults to the major credit reporting agencies and may file lawsuits against the borrower to obtain a judgment. 34 C.F.R. §685.2 1 1(d)(3)[Direct loans].
5. Statute of Limitation. There is no limitation period for an action to collect a student loan. 20 U.S.C. §1091a.
D. DEFERMENT, FORBEARANCE AND CANCELLATION.
Deferment, forbearance, and cancellation options for student loans also depend on the loan program. Be sure to consult the set of regulations that govern the particular type of loan.
1. Cancellation/Discharge. Cancellation or discharge of student loans is available in limited situations (total permanent disability or death) for Perkins [34 C.F.R. §674.61], FFEL loans [34 C.F.R. §682.402] and Direct loans [34 C.F.R. §685 .2 12]. In addition, borrowers with Perkins loans may be eligible for cancellation as teachers, for military service, service in a Head Start program, law enforcement or corrections officer service, or other volunteer service. 34 C.F.R. §674.52 — 674.63.
2. Deferment. The debtor may qualify for deferment of a FFEL loan under certain circumstances, including if the debtor is unemployed, enrolled in school, enrolled in a rehabilitation training program, temporarily disabled or unable to find employment, or in military service or a full time volunteer under the Peace Corns act or in certain other qualified programs, in an internship or residency program, or qualifies for parental leave deferment, targeted teacher deferment, or working mother deferment, or qualifies for an economic hardship deferment. 34C.F.R. §682.210(b).
Deferment is available to Direct loan borrowers if they are enrolled in school, pursuing a rehabilitation training program, temporarily unemployed, or have experienced or will experience an economic hardship. 34 C.F.R. §685.204(b).
3. Forbearance. Forbearance means permitting the borrower to temporarily stop making payments for a specified period of time, allowing an extension of time for making payments, or temporarily accepting smaller payments than previously scheduled. 34 C.F.R. §682.211; 34 C.F.R. §685.205; 34 C.F.R. §674.33(d).
For FFEL loans, there are situations when forbearance is mandatory for a lender. Otherwise, it is discretionary. 34 C.F.R. §682.211.
For Direct loans, the Secretary of Education may grant forbearance if the borrower requests it and provides appropriate documentation, such as poor health. The Secretary also has discretion to grant forbearance without requiring documentation from the borrower. 34 C.F.R. §685.205. There are similar forbearance provisions for Perkins loans. 34 C.F.R. §674.33(d).
4. Closed School Discharge. In some circumstances, the borrower may be entitled to a discharge of his or her student loan obligations if the borrower was not able to complete the program of study because the educational institution closed. 34 C.F.R. §682.402 [FFEL loans]; 34 C.F.R. §685.214 [Direct Loans]; 34 C.F.R. §674.33(g).
Submitted by: Terri A. Running
Last Updated: August 12, 2011