What kinds of student loans are there?

The two major kinds of student loans are government loans and private loans. Private loans are offered by banks, such as Discover, Capital One and Sallie Mae Bank. Most government loans are direct loans offered by the U.S. Department of Education.

When government loans become due, the Federal Student Aid division of the Department of Education is involved and they are often collected by servicers known as Private Collection Agencies, such as Navient, GC Services, Windham, Coast Professional Inc, and many others.

If I cannot afford to pay my student loan, what repayment and forgiveness programs are now available?

One of the problems with the current system is that there are too many different programs and it’s hard to figure out what programs apply to which loans.

Here is a list of some of the repayment programs:

  • Standard repayment plan
  • Graduated repayment plan
  • Extended repayment plan
  • Revised pay as you earn repayment plan (REPAYE)
  • Pay as you earn repayment plan (PAYE)
  • Income-based repayment plan (IBR)
  • Income-contingent repayment plan (ICR)
  • Income-sensitive repayment plan

Here is a list of some of the forgiveness programs:

  • Public Service Loan Forgiveness
  • Teacher Loan Forgiveness
  • Perkins Loan Cancellation (includes Teacher Cancellation)
  • Total and Permanent Disability Discharge
  • Death Discharge
  • Closed School Discharge
  • False Certification of Student Eligibility or Unauthorized Signature/Unauthorized Payment Discharge
  • Unpaid Refund Discharge
  • Bankruptcy Discharge based on undue hardship – hardly ever granted

One serious problem with forgiveness programs is that an application requires a lot of documentation, not just once, but often annually over many years. Loan servicers frequently lose papers that are sent to them, and reject final approval based on “incomplete” files.

This is a huge problem, particularly with public service and teacher forgiveness programs, to require many years of recordkeeping by the borrower.

What is a loan deferment and how is that different from forbearance?

A deferment is a required temporary postponement of payments on a loan, such as when a student continues to be enrolled in school at least half-time, is unemployed, or is on certain military duty. If the loan is a subsidized loan (if the government pays to lower your interest rate), interest may not accrue during the deferment.

A forbearance is not required to be granted usually – it is up to the discretion of the servicer. No documentation is necessary, it can be done over the phone, and the forbearance can be for 12 months at a time, up to a total of 36 consecutive months. A forbearance means your payments are temporarily suspended or reduced, but usually, interest continues to accrue on your debt.

Warning: Servicers often suggest a forbearance to borrowers since forbearances are easier for the servicer. But, since interest will continue to accrue, the borrower could be hurt by a forbearance if the borrower would qualify for a deferment (where interest does not accrue) or some other better plan.

What is the difference between my student loan being in default and being delinquent?

Your loan is delinquent as soon as you miss making a payment that is due. If you have not made a payment for at least 90 days, the servicer may report that to the credit reporting agencies, which will hurt your credit score.

Your loan is in default if you have not made a payment for at least 270 days for most government loans. If your loan is in default:

  • Your wages can be garnished
  • Tax refunds can be taken
  • The school can decide to not give you a copy of your school transcript

Why aren’t student loans dischargeable in bankruptcy?

The Bankruptcy Code says that a student loan can be discharged if paying it would cause an “undue hardship for you or your dependents.” So, what’s the big deal? If you don’t have enough money to pay your student loan, you might think that would mean that paying it would be an “undue hardship” and the loan should be dischargeable.

Unfortunately, you have to prove that it would be an “undue” hardship – not just a “regular” hardship. That is a big difference in the eyes of bankruptcy judges. Many bankruptcy attorneys across the country have litigated and appealed this issue for thousands of people with student loans since 1990.

However, the U.S. Department of Education and its collection agencies appeal virtually every court opinion that favors the debtor. An appeal from a bankruptcy judge’s good opinion can take several years and hundreds of hours of legal work. And bad opinions substantially outnumber the good ones.

How would this bill help me? I don’t want to file bankruptcy.

Neither the U.S. Department of Education nor the collection agencies have any incentive to clean up their operations. Yes, the Department is criticized repeatedly in audits for overpaying the collection agencies and not recovering the overpayments sufficiently. Yes, the Department implemented new software in 2011 without working out all its bugs and the Department and its collection agencies essentially lost track of a huge number of student loans for more than a year, which created lots of problems for borrowers. It is not clear whether that problem is resolved even now – nearly eight years later.

If this bill passes, the Department and its collection agencies will realize that if they do not shape up, be responsive to borrowers’ needs, and treat borrowers respectfully, the borrowers can make the difficult decision to file bankruptcy (assuming they qualify) and simply discharge the student loans.

By having bankruptcy as an alternative for people who really cannot afford to pay them, borrowers who do not need to file bankruptcy will benefit from a more functional Department and its collection agencies. Across the board, all borrowers will be treated better when bankruptcy becomes an option again.