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Student loans are the second largest portion of all consumer debt in the United States, behind only mortgages. But, because of the special legal protections granted to student loans, they are notoriously difficult to reduce or eliminate, unlike almost any other type of debt. Still, even though student loans are more difficult to deal with than other debt, borrowers who are overwhelmed with student loan debt have many options available to them for reducing or eliminating student loans.
In this guide, we provide a detailed review of student loans and your options in managing and ultimately eliminating them. We will cover the following topics: what is a student loan, the different types of student loans, your options in managing your loan payments, and your options in eliminating student loans through forgiveness, settlement, or bankruptcy discharge. As you read this guide, please keep in mind that it is intended to be informational only, that every situation is unique, and that you should always consult with a legal professional with respect to your specific situation.
The term “student loan” in common usage can apply to many different loans or types of financial assistance. But when we talk about student loans from the legal perspective, the definition is much narrower. In simple terms, a debt is a student loan in only three circumstances.
First, a debt is a student loan if it is made or guaranteed by the government, or funded by the government or a nonprofit institution.
Second, a debt is a student loan if it is incurred to pay education expenses at a school that is eligible to process federal student aid and is appropriately accredited. There are several additional requirements that must be met, including that the debt must be incurred reasonably close to the time that the education expenses were incurred.
Third, if you have to repay a scholarship or a stipend because you did not fulfill the requirements associated with the scholarship or stipend, then it is treated as a student loan. Although this type of debt is treated the same as a student loan, it is not a true loan. Because of this, this category of student debt, and scholarships in general, are outside the scope of this guide.
Why does it matter if a debt is a student loan? It matters because any education-related debt that falls outside the above definition of student loan is treated very differently. Basically, any debt that does not meet this definition of student loan is treated like a credit card, and is much easier to deal with.
Any loan, financial assistance, or other debt, that does not fall within one of the three categories of student loans, is not a student loan. This is so even if the lender tells you that the debt you owe is a student loan, educational debt, or anything similar.
Some examples of what is not a student loan are:
There are many more types of debt that do not qualify as student loans, but they are too numerous to list here.
Sometimes it may be difficult to determine at first glance whether a loan qualifies as a student loan, especially if you did not attend a conventional college or university, or you did not obtain the loan from a conventional lender. In such cases it is best to consult a legal professional who will help you make that determination. But understanding the different types of student loans and how they are made can help you make the initial evaluation. That is what we will discuss next.
All student loans can be broken down into two general categories: federal loans and private loans. Federal loans are either issued by the federal government, or are insured or guaranteed by the federal government. Some federal loans are issued or managed by private lenders, but are issued through federal loan programs. The federal government plays some role in all federal loans. Private loans are issued by private lenders through their own loan programs without the involvement of the federal government.
Federal loans are issued through one of several federal loan programs. The following is a summary of the major federal loan programs, along with the loans issued through each program:
Federal loans are managed by one of several loan “servicers”—companies that handle the day-to-day management of the loans, such as issuing invoices and bills, collecting payments, making sure the payments are properly applied, etc. The servicer is the entity that you will deal with when you need assistance with you loan. The following are the servicers you may deal with if you have a federal loan:
If you see the name of one of the above companies on your billing statements, you are likely dealing with a federal loan.
Another party involved with some federal student loans is called a “guaranty agency.” The guaranty agency insures the loan and pays the lender if the borrower defaults on the loan. The guaranty agency then takes over the loan and collects the defaulted loan from the borrower. In most cases, you may not even know the guaranty agency for your loan, but if your loan defaults, you may have to deal with the guaranty agency directly or indirectly. The following are the main guaranty agencies for federal loans:
Private student loans are offered by many different banks and financial institutions, often under different names. Some of the major private student loan lenders and private student loan programs are as follows:
Private student loans can be serviced by the lender itself, or you may have a servicer that is different from your lender. Some companies issue and service their own private loans, but also service other companies’ private loans, and may also service federal loans. If your private loan is not serviced by your lender, you may deal with one of the following servicers:
The options for managing and eliminating student loans differ depending on whether you are dealing with federal loans or private loans. When it comes to federal loans, there are many more options available, but because of the vast number of rules and regulations governing federal loans, the procedures are generally more complex, and if the procedures are not followed, you may not get the benefit that you expect (such as the discharge of the loan). Private loans are not subject to as many regulations. We will first discuss the rules and procedures applicable to federal loans, and then cover the options for dealing with private loans. In the last part of this guide, we will discuss how bankruptcy can eliminate both federal and private loans.
Need help with your student loans? Schedule a student loan evaluation with a Student Loan Attorney.
Everyone who starts repaying federal student loans begins on a “standard repayment plan.” This is the default repayment plan if you do not choose a different plan. On this repayment plan, the payments are fixed, and the entire loan is repaid over 10 years, or 10 to 30 years if the loan is consolidated (consolidation is discussed later in this guide).
However, so long as you are current on your payments, there are several other repayment plan options available for federal loans. The benefit of these alternative plans is that they adjust the payments based on the borrower’s ability to pay. The most popular of these plans also provide an option for loan forgiveness—these plans are usually described as income-driven repayment plans. The current income-driven repayment plans and their main features are as follows:
In additional to the above income-dependent plans, there are several other repayment plans available. These plans may be useful to some borrowers in specific situations. One important feature of these plans is that parent loans are eligible. However, unlike the income-dependent plans, these plans do not provide the option for loan forgiveness, and this must be remembered when deciding if one of these plans is right for you. These alternative plans and their main features are:
By choosing the right repayment plan, you can save thousands of dollars over the life of your loan. In addition, choosing the right repayment plan is extremely important if you want to utilize additional loan forgiveness options, such as Public Service Loan Forgiveness (discussed later).
If your loan payments are not current, then things become a little more complicated, because you may no longer be eligible for the alternative repayment options discussed above, and may not be eligible for other loan forgiveness options. However, there are ways to get back on track and regain your eligibility for the various loan repayment and forgiveness options.
In order to understand your options when payments are not current, you must first understand the difference between “delinquency” and “default.” The first day after you miss a student loan payment, the loan becomes past due, or delinquent. The loan remains delinquent until you repay the past due amount or make other arrangements, such as deferment or forbearance, or change your repayment plan. One thing to remember is that if your loan is delinquent for 90 days or more, the loan servicer will report the delinquency to the credit bureaus. In sum, if a student loan is delinquent, there are several options available for curing the delinquency, and, with the exception of the possible effect on your credit score, the delinquency does not carry long-term effects.
Default, on the other hand, carries with it much more severe consequences. When the loan is considered in default depends on the type of loan. With Direct and FFEL loans, default occurs 270 days after you first do not make a scheduled payment. With a Perkins loan, the holder can declare it in default if you do not make a scheduled payment by the due date. There are several negative consequences associated with default:
Even if you are in default, the important thing to remember is that you still have options for getting out of default.
Both deferment and forbearance provide similar relief—they put a temporary pause on your payments. These programs are not available if your loans are in default. Both of these programs are intended to assist with financial difficulties that are short-term, and are not meant as a solution to long-term financial difficulties. There are different eligibility requirements for deferment and forbearance, and which one you will qualify for depends on your circumstances.
There are several important factors to remember when considering either deferment or forbearance. First, in most cases, your time in deferment or forbearance will not count toward any loan forgiveness options. You will also not be making any progress toward paying back your student loan. Second, interest will continue to accrue while you are in these programs. In some deferment programs, you do not have to pay back the interest. But in many other deferment programs, and in all forbearance programs, you will have to pay back the interest. In addition, in many programs, unless you pay off the accrued interest at the end of your deferment or forbearance, the interest will get capitalized. This means that the interest will get added to your loan, and you will essentially have to pay interest on interest, which can drastically increase the overall amount you have to repay.
The following are some of the differences in the eligibility criteria and the effect of deferment and forbearance:
Because neither deferment nor forbearance help you with paying off your student loans, and because in most cases you will have to pay additional interest, it is often better to consider an income-driven repayment plan as an alternative to forbearance or deferment.
If you are already in default, there are several options available to allow you to get out of default. These options are: the Fresh Start program, Rehabilitation, and Consolidation.
There are several loan forgiveness options available with federal student loans.
The most broadly applicable is the loan forgiveness available with the income-driven repayment (IDR) plans discussed earlier. All of these plans provide for forgiveness of the unpaid balance after a certain period (usually 20 to 25 years).
The next most common loan forgiveness program is Public Service Loan Forgiveness (PSLF). The PSLF program provides loan forgiveness to those who work for public service employers, which generally includes government organizations, non-profit tax-exempt organizations, and non-profit organizations that devote a majority of their work to certain qualifying public services. To utilize the PSLF program, it is important to make sure that the employer you work for or plan to work for is a qualifying employer. You will be required to provide an annual certification from your employer.
Under the PSLF program, you are able to obtain forgiveness of the balance of your federal loans after you make 120 qualifying monthly payments. For a payment to be considered “qualifying,” several requirements must be met:
An important benefit of PSLF is that the amount forgiven is not taxable. The PSLF program is available only for Direct Loans, but many other types of federal loans can be consolidated into a Direct Loan to become eligible for PSLF.
Another major forgiveness program is Teacher Loan Forgiveness. Under this program, if you teach full-time for five consecutive and complete academic years in a low-income school or educational service agency, you may be eligible for forgiveness of up to $17,500 of your federal student loans. This program applies only to Direct Subsidized or Unsubsidized Loans, and Subsidized or Unsubsidized Stafford Loans. There are several other specific requirements that must be met, including detailed credentialing and certification requirements. Importantly, the maximum forgiveness of $17,500 is available only to teachers teaching math or science at the secondary school level, or special education teachers teaching at either the elementary or secondary school level. All other teachers are eligible for a maximum forgiveness of $5,000. Any amount forgiven is normally taxable, but there are protections in place under the COVID relief, making such forgiveness not taxable until the end of 2025.
The last major forgiveness program applies specifically to Perkins loans, and allows cancellation of Perkins loans. The program is designed primarily for teachers, but also applies to several other professions. The Perkins loan cancellation program allows cancellation of up to 100% of the loan. To qualify, you must:
The percentage of the Perkins loans that can be cancelled depends on the number of years served as a teacher, with 15% per year cancelled for the first and second year of service, 20% cancelled for the third and fourth years, and 30% cancelled for the fifth year.
Workers in the following fields and professions may also be eligible for Perkins loan cancellation:
In addition to the loan forgiveness programs discussed above, there are several programs available that allow you to discharge, or eliminate, your federal student loans. Because applying for and obtaining relief under these programs does not require a lawsuit or going to court, all of these programs are categorized as “administrative discharge.” (Later in this guide, we discuss a discharge available through the bankruptcy court). The following is a summary of the administrative discharge programs:
The total and permanent disability discharge allows discharge of Direct Loans, FFEL Loans, or Perkins Loans if you are totally and permanently disabled.
The false certification discharge allows discharge of Direct Loans or FFEL Loans if your school falsely certified your eligibility to receive a loan. Importantly, Parent PLUS Loans may be discharged under this program.
There are three categories of false certification through which you might be eligible for a false certification discharge:
The forgery discharge allows discharge of Direct Loans if your signature was forged or your personal information was used without your permission, resulting in a loan fraudulently made in your name. FFEL Loans and Perkins Loans are also eligible under this program if the loans are held by the U.S. Department of Education.
The closed school discharge allows you to discharge your federal student loans if you were unable to complete your program of study because the school closed, and (1) you were enrolled when your school closed, (2) you were on an approved leave of absence when your school closed, or (3) your school closed within 180 days after you withdrew. This discharge is available for Direct Loans, FFEL Loans, and Perkins Loans.
The borrower defense discharge allows you to discharge your loans if your school engaged in certain misconduct related to the making of a federal loan or the educational services the school provided, and the misconduct caused you harm. This discharge program is an alternative for those whose situation does not fall within the criteria for the forgery discharge or the false certification discharge. This program applies only to Direct Loans. Parent PLUS borrowers are also eligible for this discharge if the conduct supporting the discharge occurred to their child.
There are six grounds for discharge under the borrower defense discharge program:
The borrower defense discharge is very fact-intensive. Because of this, if you are trying to take advantage of this discharge, it is important to make sure that the application for discharge is properly and fully prepared, that all of the supporting facts are addressed with specificity, and that proper and complete supporting documentation is provided. Failure to properly prepare the request for discharge can result in denial of discharge even if you are eligible. This generally applies to any of the discharge programs discussed here, but is especially important when it comes to the borrower defense discharge.
Unlike federal student loans, private student loans are generally not subject to any special laws or regulations, and are governed by the same laws that govern contracts in general. This significantly narrows down the options available when dealing with private student loans. These options can be separated into loan modification and legal defense/litigation. A third option, discharge in bankruptcy, is addressed in the last part of this guide.
The loan modification options for private student loans are going to vary from lender to lender. Each of the major lenders that administers private student loans is going to have its own programs and procedures it offers when you miss your payments, or when your private student loan payments become unaffordable. What these procedures and programs are has to be determined in a case-by-case basis, depending on the lender. Some lenders may not have any such procedures available, and may require payment in full once the private loan goes into default. If a lender requires payment in full, it is still often possible to reach a settlement that provides for payment of less than the full amount to resolve the debt. However, if the amount that needs to be paid in settlement is still too high, then there may still be legal defenses available, which can be asserted in the lawsuit brought by the lender to collect on the loan.
For private student loan situations that have gone to a collection lawsuit, there are generally two approaches available to challenge your liability on the loan. Whether or not either of these approaches will be applicable depends on the specific situation. Additionally, depending on the specifics of your situation, there may be other, less common, legal defenses available.
The first approach to defending a private student loan collection lawsuit is based on the statute of limitations. A “statute of limitations” establishes a limit on how much time a lender has to bring a lawsuit to collect on the student loan. Almost all student loan collection lawsuits make a claim for breach of contract. The statute of limitations for breach of contract varies by state, and ranges from 3 to 10 years. For example, in Arizona, the statute of limitations for written contracts is 6 years, in California it is 4 years.
Generally, the statute of limitations begins to run when you stop making payments on a loan. If the lender does not file a lawsuit to collect on the private student loan within the applicable limitations period from when you stopped making payments, the loan may be unenforceable. However, if you later make a payment, or acknowledge the debt by some other means, the statute of limitations may be restarted. Because of this, if you are already in default on the loan, are trying to make arrangements to resolve the loan, but are unsure if your efforts will be successful, it is important to not say or do anything that could later be used to undermine your statute of limitations defense. Oftentimes, the best way to avoid inadvertently waiving your statute of limitations defense is to have a lawyer negotiate a resolution of your private student loan, because properly structured negotiations by attorneys are not treated as an admission or an acknowledgment of the debt.
The second approach to defending a private student loan collection action is to require the current loan holder to prove that it is entitled to enforce the loan. This will not work if the current loan holder is the same entity that issued the loan. However, with many private student loans, the initial loan is issued by a bank or another financial institution, but the loan is then quickly sold or transferred to another entity. The loan can then be sold or transferred several additional times, before ending up with the lender that files the collection lawsuit. The entities that purchase student loans tend to be ones that specialize in private student loan investment, and therefore they buy these loans in bulk, hundreds or even thousands at a time. Oftentimes, this results in the sales of individual loans being poorly documented, and lack of such documentation creates a potential defense in the collection lawsuit. A major example of this are the loans held by the National Collegiate Student Loan Trust (NCSLT). NCSLT purchases loans from the original lenders through several intermediaries, including National Collegiate Funding and First Marblehead Corporation, and it often lacks documentation to prove that it is entitled to enforce the loan. Of course, as noted earlier, every situation is different, and there is no guarantee that a particular NCSLT loan, or a loan held by another lender, will lack sufficient documentation. But, this is a potential defense that should always be explored.
Both federal and private student loans can be discharged, or eliminated, through bankruptcy. For many decades, meeting the requirements to discharge student loans in bankruptcy proved very difficult, because bankruptcy courts had imposed unreasonably strict limitations on discharge requests. However, in recent years, two important changes made discharging student loans in bankruptcy much easier. First, courts throughout the country have been gradually changing their interpretation of the law in a way that is both more in line with the actual language of the law, and is more favorable to people seeking to discharge their student loans. This has had particular impact on the discharge of private student loans. Many private student loans that were previously protected from discharge can now be discharged just like any other unsecured debt, such as a credit card. The second important change has been the introduction by the federal government of a streamlined and more lenient process for discharge of federal student loans. Before we talk about the specifics of these two changes, we will first summarize the requirements for discharging student loans in bankruptcy.
In order to successfully discharge a student loan through bankruptcy, you must prove that having to repay the loan will impose an undue hardship on you. Courts have broken down this requirement into three elements. So, to prove undue hardship, you must establish that (1) if you are forced to repay the student loan, you would not be able to maintain a minimal standard of living, (2) your hardship is likely to continue for a significant portion of the loan repayment period, and (3) you have made good-faith efforts to repay the student loan before filing for bankruptcy.
In order to discharge student loans in bankruptcy, you would of course need to first file for bankruptcy. There are several different bankruptcy types, and you will want to choose the right type of bankruptcy, preferably in consultation with your bankruptcy attorney. After the bankruptcy is filed, you will need to file a separate lawsuit in bankruptcy court, called an “adversary proceeding.” It is in this adversary proceeding that you (or your lawyer on your behalf) will ask the court to discharge or eliminate your student loans.
Normally, proving undue hardship is a fact-intensive process, which would usually require a trial. However, with recent changes, the process of proving undue hardship can be simplified or entirely avoided in certain circumstances, which are discussed below.
The Department of Justice (DOJ) recently introduced guidance that greatly simplifies and streamlines the process of discharging federal student loans. If your federal loans fall within the guidance, then, instead of having a trial, you will only need to submit an attestation supporting your request for discharge to the DOJ, along with the required documentation. The documents are then reviewed to determine if your circumstances meet the standards set out in the guidance. If you meet the standards, the DOJ and the Department of Education will agree to a discharge of your federal loans.
Under the DOJ guidance, the DOJ and the Department of Education still look at whether requiring you to pay back the federal loans will impose an undue hardship. For example, they will still consider your income, your expenses, and the amount of your loans. However, under the guidance, the calculation of the ability to pay the loan is generally more favorable to the student loan borrower.
One thing to note is that you must still file for bankruptcy, and file an adversary proceeding, as this is what initiates the review under the DOJ guidance. However, the guidance, if applicable, effectively eliminates all of the litigation that would normally take place after the adversary proceeding is filed. This not only saves time, but also significantly reduces the legal cost of the discharge process. On the other hand, if the discharge is not approved through the DOJ process, you still retain the right to proceed with the litigation and have the bankruptcy court determine whether your student loans should be discharged.
Currently, the DOJ guidance applies only to loans administered by the Department of Education, which includes all Direct Loans, but does not include most FFEL Loans, such as Stafford Loans. However, the program may soon be expanded to apply to these other loans as well.
Lastly, it is important to remember that the DOJ guidance is just that, a guidance, and is not a law. This means that the guidance can be changed or entirely revoked if the political preferences of the federal government change, which would happen if the political party in control of the presidency changes. Therefore, for those who may be eligible for federal student loan discharge, it may be prudent to seek such discharge sooner rather than later.
When it comes to private student loans, it may be possible to discharge them without having to prove undue hardship. The reason for this is that the protections for private student loans are much narrower that the protections for federal student loans.
For a private student loan to be presumptively not dischargeable, it has to be a “qualified education loan.” That term is very technical, and there are a number of factors that must be considered to determine if a private student loan meets the requirements of a “qualified education loan.” Some of these factors are:
The bottom line is that if any of these requirements are not met, then your private student loan can be discharged without you needing to prove that paying it back will cause you undue hardship. Because of this, if you are considering eliminating private student loans in bankruptcy, it is beneficial to have the loans evaluated by an attorney specializing in student loans.
And, of course, even if your private student loan is presumed to be not dischargeable, you still retain the ability to eliminate it by showing that having to repay it will cause you undue hardship.
With the federal student loan payments resuming in October 2023, dealing with student loan debt can seem like an overwhelming and insurmountable obstacle. However, it is important to know that there are options available for reducing or even eliminating your student loans. What is important is to not wait until your wages are being garnished or other adverse action is being taken against you. Being proactive and planning ahead is the first and most important step in obtaining a successful resolution of your student loan debt.
Not sure what to do about your student loans? Contact us for a 15-minute complimentary student loan evaluation with a Student Loan Attorney.
The above is provided for general informational purposes only. It is not intended to and does not constitute legal advice, and does not create an attorney-client relationship. If you need legal advice for your specific situation, you should contact a qualified attorney in your area.
To discuss your financial situation and learn more about your debt relief options, give us a call at (520) 745-4429 or (480) 788-0098.
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