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Wednesday, March 3rd, 2010

Handling Student Loans Outside of Bankruptcy

As a recent article from the Wall Street Journal highlights, student loan debt is a huge burden for many Americans. But, unlike credit card debts, student loans cannot typically be discharged in a bankruptcy filing.

And now, as layoffs and salary reductions become more and more common around the country, many once-comfortable graduates are finding themselves unable to meet the terms of their loans. Here are some ways you can handle your student debt.

Know Your Numbers

If you need to rework the terms of your student loans, consider contacting your lender. But before you do so, take these preparatory steps:

  • Outline your budget: Crunch the numbers and figure out what you can realistically afford to pay each month.
  • Read the fine print: Make sure you understand the terms of your loans as they now stand so that you’ll be ready to ask for specific modifications when you speak with your lender.

Once you’ve determined what kinds of payments you can make, familiarize yourself with your options for repayment. Depending on your circumstances, these may include the following:

  • Modify your repayment plan: Some lenders offer graduated repayment schedules, meaning you pay more per month as you go along (which can be useful if you expect to make more money in the future). If your loans are through the Federal Government, visit the Federal Direct Loan web site to see your choices.
  • Consider a deferment: Many lenders offer you a chance to defer payments for a variety of reasons (such as going back to school, working in certain fields, being unemployed, etc.). Check with your lender to see how to apply, but keep in mind that interest will likely still accrue during the deferral period.
  • Apply for forbearance: You may also be able to make reduced payments or suspend payments altogether for reasons of financial hardship but, as with deferments, interest will likely still build up.
  • Look at consolidation: Consolidation offers often prove helpful because they allow you to make a single payment each month and can even help lower interest rates. But be sure you understand the complete terms—some come with prepayment penalties.

If you’re just beginning school and considering loan options, remember that they may not seem like a big burden at this stage, but can add up quickly and should be considered carefully.

Additional Resources

Federal Student Loans: Learn the Basics and Manage Your Debt (PDF)

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Posted in Setting the Record Straight about Bankruptcy | 6 Comments »

Tuesday, December 1st, 2009

Student Loan Bankruptcy Case Argued in Supreme Court

The U.S. Supreme Court began hearing today the case involving a debtor whose student loans were discharged in a Chapter 13 bankruptcy—though possibly against the U.S. Bankruptcy Code.

Student loans are notorious for being difficult to discharge in bankruptcy, even in a Chapter 13 bankruptcy. In order to have student loan debt eliminated, a debtor must prove undue hardship.

In the case before the Supreme Court, the debtor, Francisco Espinosa, was allowed to enter a Chapter 13 plan without ever proving undue hardship to the bankruptcy court, according to a story on National Public Radio.

The Bankruptcy Case

In 1988, Espinosa was a baggage handler for America West Airlines when he began taking computer drafting classes at a technical school. Espinosa took out four student loans totaling over $13,000 from United Student Aid Funds.

After earning his degree, Espinosa was unable to find work in the computers field, and continued working at America West. However, that company was facing its own financial strain, and began cutting salaries. In 1992, Espinosa, a college graduate earning $6 an hour, filed bankruptcy.

According to the NPR story, Espinosa agreed to repay the full amount of the student loan debt through a three-to-five year Chapter 13 plan—but not the $4,000 of interest accrued on the loan. USAF was notified several times of the terms of the plan, and never objected to the case.

In 1997, the bankruptcy court declared Espinosa's debt repaid, and issued him a debt discharge.

However, two years later, USAF issued a lien on Espinosa's tax return for the unpaid interest. USAF claimed that the bankruptcy plan was illegal—11 years after the court confirmed it—because of the undue hardship requirement.

Undue Hardship Hearing Never Held

The student loan company argues that the bankruptcy court should have held a special hearing to determine whether Espinosa's situation qualified as an undue hardship, and should have summonsed USAF to appear in court. Because the hearing was never held, undue hardship was never established, and the loan should not have been dischargeable, USAF argued.

Espinosa's attorney has argued that USAF was properly notified and did not raise any objections at the time. A federal appeals court agreed.

Now it's up to the Supreme Court to decide just when a creditor can raise objection to a Chapter 13 bankruptcy plan—and when the can still collect on debts.

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Posted in Bankruptcy News and Events | 21 Comments »

Friday, September 18th, 2009

Education Loan Reform may ease Debt-Burdened Students

Thursday's news of the House of Representatives' decision to back President Obama's plan to end the Federal Family Education Loan Program (FFELP) has brought considerable tones to both sides of the political plate.

Democrats are in praise of the House bill, saying it represents a victory for students over the banks. Not surprisingly, most Republicans criticize the bill as a government takeover of an industry that has served students well.

But how will the passage of this bill and the resulting of the FFEL program dissolving affect those in the burdens and confines of bankruptcy?

The FFELP is the private sector student loan program that makes higher education affordable and accessible for millions of students and their families.

In today’s cumbersome financial climate more students than ever before are dependent on student loans to finance their education. According to SallieMae, roughly 78% of all student loans (were) provided under the FFELP, representing an estimated $64 billion in FY2009.

The Cost of Higher Education

What about those families who are struggling with bankruptcy and the financial burden of financing a college education? Will this place an even heavier burden on them?

There aren’t any benchmarks at this point to know, especially since this hasn’t been placed into a bill as it still sits within the Senate for approval. There is thought though that for those who are in the throes of bankruptcy this might offer a glimmer of hope to keep the two acts separate- bankruptcy and tuition.

Outlining this is the mere fact that by shifting towards a more universal financial aid lender, based in the federal government, then there will be less restrictive requirements for obtaining a loan.

If this were to happen then eligibility would be based more on the worthiness of the applicant as whole rather than of a credit score and history. In this it would also then put the responsibility of divvying up the offering to students by colleges a more balanced act.

Bankruptcy and Student Loans

Overall, there are two major points to consider if this bill passes the Senate. First being that filers for bankruptcy who are themselves applying for financial aid will not be able to discharge their student loans in the petition- unless they bring an action known as an Adversary Proceeding to the Bankruptcy Court. This would prove to the court that repaying the loans will create an undue hardship on themselves and their dependents.

Second and equally important is that one has nothing to do with the other; they are in fact mutually exclusive. The act of filing bankruptcy is one that is done in the spirit of reinvention, to give the petitioner a fresh start.

Adding to the mix the possibility that this person is either a college student needing financial aid or has a dependent who needs it has no bearing in the court process.

By taking the financial aid award out of the hands of our nation’s banking institutions and placing into the arms of our government- where many, many students already receive their loans ( via Perkins loans and others) - they are simply asserting a strategy to try and save close to $80 billion for our nation.

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Posted in Bankruptcy News and Events | No Comments »

Thursday, September 17th, 2009

Student Loan Debt: Can it be Forgiven?

Back in the good old days (that is, before the global economy took a nosedive), many states offered loan forgiveness programs for graduates who chose to work in public service once they got their degree.

Now, thanks to budget cuts and a lowered demand for student loans on the secondary market, many states have had to pare down their educational debt forgiveness programs.

How Do Your Loans Measure Up?

Federal student loans generally come from one of two sources: the Federal Family Education Loan Program (FFEL), which includes Stafford and PLUS loans, and the William D. Ford Federal Direct Loan Program.

Those with Direct Loans may qualify for more forgiveness programs, so if you have FFEL loans, you may want to consider consolidating your loans into one Direct Loan (the government websites above have details on how to do this).

Forgiveness for Members of the Armed Forces

  • Interest accrual freeze: If you’re on active duty during war, mobilization or a national emergency and have a Direct Loan from October 1, 2008 or after, you may qualify to have your interest frozen for up to five years. This would prevent the amount you owe on loans from growing while you serve.
  • Interest rate cap: If you join up after taking out a loan, you may qualify to have the interest you pay on that loan kept below a certain rate. Further, if you took out FFEL loans before August 18, 2008 and were an active service member at the time, you may qualify to have your interest rate capped at six percent.
  • More forgiveness for Perkins loans: While five years of military service has long qualified you for a 50 percent forgiveness of Perkins loans, new rules allow 100 percent of such loans to be excused after five years for those who have served at least a year as of August, 2009.

Forgiveness for Teachers

  • Multi-district workers: As long as you teach in economically disadvantaged areas (labeled as “Title I” in the No Child Left Behind Act), you should qualify for forgiveness of FFEL and Direct Loans. Now, educational workers who teach part-time at more than one district or school can also qualify.
  • Your subject matters: The amount of forgiveness you qualify for depends on what you teach. Those who become instructors in underserved areas (like high school math and science) can expect the government to cover more of their loans.

Forgiveness for Public Service

FinAid.org lists the “service” career paths you could choose to have your loans forgiven, but the relief won’t be immediate. In fact, you’ll probably need to make payments and work in the field for a decade before your remaining debt is wiped out.

Student Loans in Bankruptcy

Student loans are one of the most difficult types of debt to discharge in bankruptcy. Debtors must prove that the loan presents an undue hardship, such as an injury that prevents the type of work for which the degree was earned. Additionally, the debtor must have made a good faith effort to repay the loan prior to filing bankruptcy.

Additional Resources

No Child Left Behind: A Toolkit for Teachers (PDF)

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Posted in Bankruptcy and the Economy | 1 Comment »

Thursday, July 2nd, 2009

Student Loan Relief Begins for Some in July

If you’re among the hundreds of thousands of recent college graduates with significant student debt hanging over your now degree-laden head, good news: A new program called Income-Based Repayment may help you tame the debt monster.

What is Income-Based Repayment (IBR)?

IBR is a program introduced by the government in 2007; however, its full effects don’t start until July 1st – which is perfect if you’re a recent grad. Essentially, the program was designed to make sure that graduates who aren’t making the big bucks right after graduation aren’t spending all their earnings on repaying student loans.

IBR can help with people who meet the following criteria:

  • Have loans (to students, not their parents) from either the Direct or Guaranteed (FFEL) loan programs or (most) government-funded loans
  • Have enough debt to qualify. Specifically, have debt that would require you to spend more than 15 percent of your income in excess of 150% of the poverty level to pay off your loans in ten years – calculator available here

Interest Rates for Adjusted Loans

While the IBR program may make your monthly payments more affordable, it could also mean that your monthly payments don’t cover your full interest rates. This means that:

  • For federally subsidized loans, the government would pay the remaining interest for the first three years
  • For non-subsidized loans, the unpaid interest would be tacked onto the principal amount you owe

The second option may mean you end up paying more in the long term, but if your earnings increase over the years, this likely won’t be too big a problem. Plus, the IBR program has the unique caveat that any amount still due after 25 years is forgiven.

What is Public Service Loan Forgiveness?

It’s the other loan forgiveness program taking full effect this month, and it’s designed to help those who work in certain so-called public service jobs, including those for the government and nonprofit 501(c)(3) organizations.

If your job qualifies under this program, your loans may be forgiven in full after 10 years of work (during which time you make normal loan payments). And, if your salary qualifies you for IBR loan payments while you’re working, you can still use that program to make payments more affordable.

To find out whether your employment situation may qualify you for help with student loans, visit this website http://www.ibrinfo.org/index.php.

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Posted in Financial Literacy | 135 Comments »

Wednesday, June 3rd, 2009

Recession Effect: Student Loan Forgiveness Programs at Risk?

It seems like every day there’s a new area of the economy hurt by the current recession.

Unfortunately, today’s no exception. A recent report in the The New York Times suggests that student loan forgiveness programs may be in danger of diminishing, which could be bad news for the country.

What Is Loan Forgiveness?

Loan forgiveness works by adding incentives for doing certain types of work: In exchange for agreeing to work in specific fields, usually in a pre-determined area of the country, for a set number of years, the state will forgive a certain amount of your student loan debt. Currently, the government forgives loans for:

  • Math, science, special education, foreign language and other shortage-area teachers
  • Teachers in low-income areas
  • Social and childcare workers
  • Peace Corps volunteers
  • People with law and medical degrees working in areas in need of their services

Forgiveness programs have several benefits. Here’s an overview of how they work:

  • Students choose jobs with relatively low incomes but high value. For example, someone with math or science skills may choose to teach rather than go into banking right away, knowing that a few years in the classroom will eliminate most or all of her student debt.
  • Communities in need of skilled professionals get the workers who can help them. Most government programs work by identifying specific places, usually low-income areas, where graduates can work to have their loans forgiven.
  • Recent graduates eliminate worry often associated with educational debt. Because student loans cannot be discharged in most bankruptcy filings, it’s important for graduates to repay them, and forgiveness programs help them do so.

Recession = Less Loan Forgiveness?

Now, many states are struggling to balance their budgets and forgiveness programs are reportedly seen as non-essential in many cases.

And the federal government and private sources of income are similarly strapped, which translates to less money all around.

It’s not hard to figure out what this could mean in the long run: current students will be less likely to enter low-paying fields because they’ll have heavy loans to repay.

Those currently in loan forgiveness programs may look for better-paying work elsewhere if their forgiveness amount is cut. And communities in need of competent nurses and teachers will suffer.

If you're neck-high in debt, take some time to learn about filing bankruptcy.

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Posted in Bankruptcy and the Economy | 7 Comments »

Thursday, May 21st, 2009

Student Loans: Can They Be Discharged by Filing Bankruptcy?

For many recent college graduates in the United States, the party is over (or nearly over) and life in the “real world” is about to begin.

Thanks to historically high education costs and the struggling economy, graduates across the country are likely worried about paying off education loans.

In most cases, student loans can't be discharged in Chapter 7 bankruptcy, which means that students and recent graduates should stay on top of these loans if at all possible.

Here are a few tips for new grads looking to start their careers as degree-holders on the right financial foot.

Deferment & Forbearance

In many cases, graduates are not required to begin paying back student loans immediately after graduating. Some lenders offer a six-month “grace period” before payments come due.

Many borrowers also qualify for deferment or forbearance of their payments.

• Deferment: Deferment allows borrowers to postpone payment on their loans for a variety of reasons (for example, if the borrower remains a student by pursuing a second degree). When a subsidized loan is deferred, no payments are made and no interest accrues; when an unsubsidized loan is deferred, no payments are made but interest does accrue.
• Forbearance: Forbearance works by temporarily reducing (to as little as nothing) the amount of money a borrower owes each month. Various financial difficulties can qualify a borrower for loan forbearance.

Loan Consolidation

If you don’t qualify for forbearance or deferment, or if you’ve already exhausted your options, you may want to consider consolidating your loans to ease your payments. Since they typically can't be included in bankruptcy, this may be your best bet for debt relief.

The government’s borrower services Web site for student loans provides graduates with applications and instructions for consolidating their loans into a single payment.

Some advantages of loan consolidation include the following:

  • You’ll only have to write checks to a single lender each month, the Department of Education. Further, you’ll only have a single payment to make, rather than several.
  • You have four repayment plans to choose from, and you’re permitted to switch from one to another if your financial circumstances change.
  • You may be able to reduce the dollar amount of your monthly payments (although this will likely mean a longer repayment period).
  • There is no maximum or minimum dollar amount you can have to qualify for loan consolidation.

Finding a Job After Graduation

Of course, you can’t make any payments if you don’t have any money coming in. This BusinessWeek.com article details the best job markets for recent college graduates in the current economy.

And, finally: Congratulations if you’ve just earned a degree and good luck with the next phase of your life!

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Posted in Financial Literacy | 1 Comment »

Thursday, May 1st, 2008

Student Lending Bill Passes Senate Unanimously

After the mid-April House passage of a bill to address the shortage of student loans caused by the credit crunch, the Senate voted unanimously May 1st to pass a similar bill.

According to the Wall Street Journal, Congress acted quickly to address the issue in time to help students applying for loans for the fall semester.

President Bush has expressed support for the measure.

Both the Senate's version of the bill and the House's allow the government to temporarily buy more student loans to pump cash into the market.

The two versions also allow students to borrower larger dollar amounts in federally-backed loans.

Experts expect the House to pass the amended version.

Can't pay off your loans? Learn about filing bankruptcy.

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Posted in Credit and Bankruptcy | No Comments »

Friday, April 18th, 2008

Student Loan Legislation Passed in the House

Amidst concerns about student loan availability and affordability during the credit crunch, the House of Representatives has approved a measure that would allow the Department of Education to purchase federally guaranteed loans that lenders cannot sell to private lenders and also increase the amount of money that students can borrow.

Just yesterday, Bank of America was the latest in a long line of lenders who said that they will no longer make private student loans available as a result of the credit crunch and a lack of financial backing in such asset-based securities from investors.

According to estimates from the Education Department, nearly 7 million borrowers will require more than $68 billion in federal loans this academic year.

Can't make your bills? Learn about filing bankruptcy.

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Posted in Bankruptcy and the Economy | 1 Comment »

Monday, April 14th, 2008

Credit Crunch Update: Sallie Mae to Charge for Student Loan Applications

In the last week or so, we've been talking a lot about how the U.S. credit crunch has sparked fears about student loan availability.

With this in mind, the country's largest student loan lender -- Sallie Mae -- announced late last week that it will be cutting certain types of student loans and charging loan application fees ranging from $35 for freshman students to a couple hundred dollars for graduate students.

Noting that one-third of the top 100 student loan lenders have left the business as a result of current credit difficulties, a high-ranking Sallie Mae official provided some more reasoning behind this decision:

• Sallie Mae to Charge for Loans to Students

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Posted in Bankruptcy News and Events | 4 Comments »

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