Student loan debt is a growing problem for graduates which is why it’s been a big part of the political discussion leading up the elections next year. In fact, Elizabeth Warren, Senator from Massachusetts and Presidential Candidate, has a plan to cancel student loans called the Student Loan Debt Relief Act. When you look at the numbers, you cam see why. Even leaving aside law school graduates who often leave school with more than $100,000 in debt, the average student walks out of a four-year degree with almost $30,000 in student debt. California students carry less debt than the national average — just over $20,000. However, $20,000 is still a substantial figure. A high debt load can make it hard for graduates to make ends meet. It can also make it harder for grads to get credit cards, car loans, and mortgages.
Defaulting on student loans can result in wage garnishment and withholding of federal benefits. If you have more student loan debt than you can afford, can a lawyer help you?
What Happens When You Can’t Make Student Loan Payments
If you start missing payments, you’ll go into delinquency and default. There’s a distinction between default and delinquency. You’re “delinquent” on a loan the day after you miss a payment. Your lender will report the delinquency to the credit bureaus if your account stays delinquent for 90 days or more. You’re in “default” after 270 days without payment.
When you’re delinquent on a loan, the biggest consequence is generally the impact on your credit score. A low score will make it hard for you to get a car loan, a credit card, a cellphone plan, an apartment, or anything else for which you need credit. You’ll receive notices from your lender about your delinquency along with demands for payment.
In default, the consequences are much more severe. Generally, the entire amount of the loan comes due as soon as you default, including any collection fees. Default will damage your credit score even more than delinquency. Default also opens you up to collection actions, where your lender can get a court order to garnish your wages, withhold certain federal benefits, or intercept your income tax refund and apply it toward your debt.
What should I do if I can’t afford my student loan payments?
If you have federal or private student loans and you know that you’re going to miss a payment or that you won’t be able to make your payments going forward, reach out to your lender or loan servicer as soon as possible. Explain your situation to them and ask them to work out a resolution with you. They may extend your grace period, lower your interest rate, or settle for a lump sum of less than the total amount of the debt. If you can’t reach an agreement on terms that work for you, you still have other options.
You may be able to rehabilitate your federal student loan. To rehabilitate your loan, you’ll need to sign a rehabilitation agreement with your lender that specifies your new “reasonable and affordable” payments. If you make nine on-time payments in 10 months, your loan will no longer be in default and the default will be removed from your credit history.
Once you’re out of default, you no longer have to worry about garnishment or withholding of benefits or your tax return. You’ll also be able to qualify again for aid, deferment, forbearance, or a choice of payment plans.
The lender will look at your income and expenses to determine what is affordable for you. A reasonable payment is generally at least 1% of the loan balance. Your payments are on time if you pay within 20 days of the due date for FFEL and Direct Loan program loans and within 15 days for Perkins loans.
You can only rehabilitate a loan one time. After that, you’ll have to look at other options.
You may also get out of default by consolidating your debt. Debt consolidation means combining your debts into one debt with a fixed interest rate. Generally, you’ll have to make at least three payments on time to qualify for consolidation. Most federal student loans are eligible for debt consolidation, but private student loans are not.
A consolidated loan is usually much easier to manage than several different individual loans; it’s simpler to manage one payment and your interest rate is typically lower. Consolidation can also extend the life of your loan up to 30 years. When combined with a low fixed interest rate, that can make for significantly lower payments.
It’s important to note that you can only qualify for debt consolidation one time. Once you’ve consolidated, you’re stuck with that loan. Make sure you take a careful look at the rates you’re offered before you decide to consolidate. You’re also looking at a 30-year loan, which means you’ll be paying a lot more interest than you would over the standard 10 years. If you can find a way to pay off your loan sooner, it will save you a lot of money in the long run.
Forgiveness and Cancellation
In some cases, you may not have to pay your loan at all. These cases are rare, but they do happen.
If you can’t make payments because you’ve been injured or ill and now have a permanent disability that prevents you from working, you may qualify for complete forgiveness of the loan. That type of loan forgiveness requires a “total permanent disability.” In other words, you must be permanently disabled. If you’re expected to recover or if your disability will allow you to work, you won’t qualify for forgiveness. A disability qualifies as permanent if it’s expected to last for at least five continuous years or if it’s expected to be fatal. If you die, your loans will also be forgiven.
You may be entitled to loan forgiveness if your school falsely certified your eligibility to receive loans in the first place. That may involve the school falsely claiming that you are qualified to work in the field for which you are receiving training. For example, California requires a high school diploma or GED in order to get a cosmetology license. The cosmetology school must certify that you are qualified to work in cosmetology in order to get you your loan. If they falsely certify that you’re qualified for a loan even though you don’t have a high school diploma or GED, you can have your loan forgiven. If you don’t meet the basic requirements for licensing in the field for which you’re training, you will never be able to benefit from that training. Schools are supposed to ensure that you’re able to benefit when you sign up, but they sometimes falsely certify your loans either through genuine oversight or through a desire to keep admission numbers (and tuition payments) high. You’re entitled to forgiveness of loans used for an education that you could never use.
You may also be entitled to loan forgiveness if your school closes while you’re enrolled or within 120 days of you withdrawing from the school. You can only have your loan forgiven if you don’t transfer to another, similar program at another school. If you’ve finished your coursework, even if you haven’t received a diploma or certificate of completion, you are not eligible for loan forgiveness. You’re also not eligible for loan forgiveness if you withdrew from the school more than 120 days before the school closed.
Direct Loan program loans may also be forgiven completely or in part if you take a job in public service or as a teacher. Teachers who work full-time in a low income elementary or secondary school for at least 5 consecutive years are entitled to forgiveness of up to $17,500 of loans, although certain types of loans are excluded from the program. If you work in public service and make all of your payments for 10 years, the remainder of your loans may be forgiven.
Private Student Loans
If your student loans are private, you’ll need to work with your specific lender. Your options are more limited than those that come with federal student loans and you may be paying a higher interest rate to begin with, making the situation tougher. You may be able to refinance the loan or pay a lower interest rate than the original agreement. Private student loans don’t come with the repayment options and forgiveness programs associated with federal student loans, so they’re more difficult to manage.
Generally, student loans cannot be discharged in bankruptcy. In order to obtain a discharge, you’ll have to prove that you will never, under any circumstances be able to repay the loan. The court will often only allow a discharge for very serious extenuating circumstances.
Discharges of student loans are almost never granted. When they are granted, it’s because repaying the loans would cause “undue hardship” on the borrower. That boils down to situations where the borrower is never expected to be able to cover the basic necessities of life and make loan payments. The undue hardship must be expected to last for a long time — temporary issues are not grounds for discharge of student loans in bankruptcy. In addition, you’ll have to make a good-faith effort at repayment. In general, that means you have to make payments for at least 5 years. If you haven’t attempted to repay your loans, your discharge may be denied even if the repayment represents an undue hardship.
Bankruptcy laws regarding student loans are extremely harsh and extremely difficult to get around. They’re designed to prevent students from borrowing to finance their education and then filing a bankruptcy right after graduation, allowing them to shake off student loan debt when they don’t have any real assets or interests at risk. The fear is that students will shake off their debt and then go straight on to high-paying jobs, leaving taxpayers to foot the bill for the unpaid federal loans. So, the laws are set up to prevent discharge of student loans in all but the most dire of circumstances.
What can a lawyer do for me?
First, if you’re in default, you need to worry about collection lawsuits. Those can be complicated and time-consuming and you’ll need a lawyer to defend you.
Second, a lawyer can help you communicate with the government entities and private contractors involved in the student loan process. Your lawyer will know what sort of relief you can qualify for and how to get it. She’ll also know if you have a claim under the Fair Debt Collection Practices Act or another consumer protection law. A lawyer can also ensure that your lender or loan servicer treats you fairly and adheres to the terms of any negotiations.
Finally, if you’ve suffered a serious injury or developed a serious disability, your lawyer can get your student loans discharged through the bankruptcy process.
It’s difficult to face a government agency and a slew of banks and loan service providers alone. The processes by which you can apply for relief are complex and difficult to navigate. A lawyer can protect your rights and help you get the best possible outcome. If you’re struggling with debt, student loans or otherwise, reach out to an experienced attorney today for a free consultation to discuss your circumstances and options.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.