Site Loader

America is in the midst of a student loan crisis. There is $ 1.56 trillion in total US student loan debt, with over 44.7 million Americans contributing to that number.

This national problem is due in part to people’s lack of knowledge concerning their financial decisions while in college. In a recent survey by Student Loan Hero, they concluded that “More than one-half of our survey respondents, for instance, didn’t realize interest accrues on their federal unsubsidized loans while they’re in school” and “nearly 1 out of 10 borrowers are under the false impression that you don’t need to repay your loans if you can’t find a job after college.”

This lack of knowledge over the course of the lending process can lead to what is known as student loan hardship. This article will cover all the basics of student loans, hardships, and solutions so that you are well equipped and informed in deciding which option is best for you. It may seem to some that there is no hopeful end in sight, but there always is.

What Are Student Loans?

College is expensive and the price for attending is growing steadily. The purpose of a student loan is to help provide funds for tuition, room and board, and books at a low-interest rate. There are 3 main types of student loans; they are important to know as there are differentiations between the corresponding debt relief. 

1) Federal Student Loans

Federal student loans are those given by the government. Their amount and interest rate are also determined by the government. Applications for federal student loans are through a FAFSA (Free Application for Federal Student Aid) form. The standard plan of repayment after receiving a federal loan is by paying a certain amount of your debt and the interest per month, for up to 10 years. To see an estimate of what your payment would look like, you can use the US Department of Education’s calculator. Should it be needed, federal student loans are more likely to provide relief compared to private loans. 

Subsidized vs. Unsubsidized Federal Loans

There are two major distinctions between federal loans, subsidized or unsubsidized. Subsidized federal loans are loans given by the government, but for financial reasons. While unsubsidized federal loans are those given by the government as an additional aid for paying for college expenses. These two distinctions are important to know because repayment plans and interest are dependent on these factors.

2) Federal Parent Loans

Although this may seem a bit confusing at first, these types of loans are exactly what they sound like. Federal parent loans, also known as PLUS loans, are unsubsidized loans given by the government to parents of dependent college students as well as graduate students. These are granted through application and have the same repayment plan options. However, PLUS loans have a fixed interest rate of 7.9%.

3) Private Student Loans

Private student loans are straightforward. They are loans offered by banks or credit unions. They are not at all connected to the federal government or colleges. As previously stated, it is easier to receive relief with federal student loans compared to private student loans.

All three of these loans have their own respective repayment plans. Where many people find themselves lost is knowing what happens if you fall behind or are unable to keep up with your repayment plan.

Student Loan Hardship

Student loan hardship is the technical term for when you are behind on your payments for your student loans. 

There are potential consequences to not paying your debts. A default on a student loan occurs when you do not make a payment for your student loans in more than 270 days. If this happens, you lose your eligibility for further federal student aid and may face legal consequences. 

This is worrisome. However, depending on the extent of your hardship, you may apply for some form of debt relief. 

Contact Lender

First and foremost, the first step if you find yourself unable to keep up with your payments is to contact your lender. Being open and acknowledging your situation to your loan servicer is the first step you can take in finding a solution. By contacting your lender, you can learn of the variety of options that are available to you.

Finding A Short Term Solution

Sometimes it can be hard, especially if you have just finished college and are searching for a job, to make enough money to keep up with your payments. In these cases, it is best to find a short-term solution. 

1) Deferment 

Through the application, deferment temporarily places a stop on your monthly payments for a certain amount of time, lasting up to 5 years. Deferment is for subsidized loans, meaning that during the period of deferment you are not responsible for the interest that would otherwise accrue during that time. Reasons for deferment can include unemployment, maternity leave, medical leave, or disability.

2) Forbearance

Forbearance is very similar to deferment except that it applies to those with unsubsidized loans. This means that you are still responsible for the interest that acquires during this period. Forbearance can only last for up to a 3 year period and the reasons for forbearance are similar to those of deferment.

You can learn more about the qualification for deferment or forbearance here.

Finding a Long Term Solution

If you see yourself as being unable to make your payments in the long term scope, there are still options for you.

1) Income-Driven Repayment Plan (IBR)

If your debt payments are much higher in comparison to your income, you may want to consider switching to an income-driven repayment plan. With this option, your monthly payments are calculated as a percentage of your income, typically over a 20-year plan. Your payments can be adjusted monthly according to both your income and family size. You must recertify your plan every year to determine, among other reasons, whether this option is still the best for you. To see whether this option is best for you right now, you can use the same Department of Education’s calculator which factors in all federal student loan repayment plans to compare your options and suggest what is best for you.

2) Student Loan Forgiveness

Student loan forgiveness is only granted in certain cases. If granted, a part or all of your student debt is forgiven. Professions that commonly qualify include those in emergency response work, federal jobs, education, social work, public health, military, and volunteer work.

3) Bankruptcy

One of the most common questions I receive is whether filing bankruptcy can discharge student loan debt. It is difficult for student loan debts to be dischargeable in bankruptcy. Student loan debt is a significant financial burden for millions of individuals in the United States. According to 2020 figures, approximately 45 million people owe a total of $1.6 trillion in student loan debt. Student loans are second only to mortgage loan debt.  One of the most commonly searched bankruptcy questions is, “Can I get rid of student loan debt in bankruptcy?” The answer is, “maybe.” Let’s take a close look at what student loan bankruptcy may look like.

I) Why is it Difficult for Student Loans to be Dischargeable in Bankruptcy?

Student loans are one of the few unsecured debts that are not eligible for a bankruptcy discharge (debt forgiveness). If you file a bankruptcy case, you likely will continue to owe your student loans. However, there are exceptions to that rule. Some individuals can qualify for a hardship discharge of student loans. However, you must petition the court for the student loan discharge and meet all requirements under the Brunner Test.

II) How Can I Discharge Student Loans in Bankruptcy?

The Brunner Test is a set of three requirements that a debtor must meet before discharging student loan debt in Chapter 7 bankruptcy. The requirements are based on the findings in a 1987 bankruptcy case (Brunner vs. New York State Higher Education Services, Corp.). In the Brunner case, the bankruptcy judge used a three-prong test to determine if the debtor could discharge student loan debt. Other bankruptcy judges have adopted the Brunner Testin other cases. The requirements to discharge student loan debts are:

1.  Minimal Standard of Living Test 

The first element determines whether the debtor can maintain a minimal standard of living for the debtor and the debtor’s dependents if the debtor continues to repay the student loan. If the answer is yes, the court concludes that the student loan debt is not dischargeable in bankruptcy. If the answer is no, the court moves to the second element. 

2.  Continuation of Current Financial Situation

The second element analyzes whether the debtor’s current financial situation is expected to continue for the majority of the remaining term of the student loan contract. For example, is the debtor now disabled and will not be able to return to work? Or, is the debtor earning near the maximum income expected based on the debtor’s age, career, education, skills, and other factors? If the debtor’s current financial situation is expected to improve during the term of the student loan, the judge may not grant a discharge of student loan payments. 

3.  Good Faith Effort

If the debtor passes the first two tests, the judge determines whether the debtor has made a reasonable effort to repay the loans. If so, the judge may grant a bankruptcy discharge for student loans.

III) Defining Undue Hardship and Good Faith Effort

Less than 1% of people who file for student loan bankruptcy are discharged from their debt. The reason it is so difficult is that in order to qualify you need to prove you are under “undue hardship”. In other words, you need to prove that you will be unable to pay your debts in the foreseeable future while also maintaining a healthy standard of living. Nevertheless, the option still exists for some. There are two main types of bankruptcy: Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.

Unfortunately, there is not a standard definition for what constitutes an undue hardship or a good-faith effort. Judges use various methods to determine whether student loan payments create undue hardship that prevents a minimum living standard. Likewise, judges have interpreted the good faith effort in various ways.

Working with a bankruptcy lawyer can be helpful. A local bankruptcy attorney is familiar with the bankruptcy judges and cases decided in that district. Therefore, the attorney understands the standards used by the bankruptcy judges to decide motions to discharge student loans. Furthermore, a bankruptcy attorney can draft a motion and present a case that gives you the best possible chance of success based on your unique circumstances.

Overall, bankruptcy may be an option for you if you are under too much student loan debt, but there is a rather low chance that the loan will be discharged. It’s more likely that you will either have the debt put into a payment plan, or you will have assets liquidated to pay off the loan. Either way, bankruptcy can be helpful if you are unable to continue making payments. 

IV) How to Pay Student Loan Debts?

There could be several non-bankruptcy options to handle your student loan debts. If you are struggling with student loans, you may want to research the following repayment options.

If you experience a short-term financial hardship, you might qualify for a student loan deferral or a forbearance. The deferral or forbearance may provide temporary relief from student loans until you recover from a financial crisis.

Chapter 13 Bankruptcy and Student Loans

If you cannot discharge student loans through Chapter 7, you can obtain some relief through Chapter 13. During your Chapter 13 case, your student loan payments are deferred. They continue to accrue interest, but you are not required to pay the loan payments until your case is completed. Some debtors choose to continue paying their student loan payments in full or part during the Chapter 13 case. Other debtors wait until their bankruptcy plan is finished to resume payments. By discharging other unsecured debts through Chapter 13, the debtor is in a better financial position to repay their student loan after the Chapter 13 discharge

Conclusion

Everyone who receives student loans is faced with having to repay them. Some are able to take care of them, some are not. Regardless, there are plenty of options that can help you to find a solution for your student loan debt. Ascend is able to help if you are confused about your options. Talk to one of our counselors to learn more about what options are available to you and which may work best for your situation. 

Post Author: Delali

Delali is a writer for Ascend where she shares in depth personal finance articles on such topics as financial hardship, student loan hardship, and ways to reduce your expenses.

Leave a Reply

Your email address will not be published. Required fields are marked *