Managing Your Student Loans

I HAVE A STUDENT LOAN THAT I CANNOT PAY, IS THERE ANYTHING I CAN DO?

Yes! The worst thing that you could ever do with any loan, especially a student loan is to do nothing. You do have options. The options that you have depend on the type of loan you have. Some important terms to know are:

Original Lender - this is the school, company or bank that loaned you the money

Guarantor - this is the entity, usually it is the state or the federal government, which sponsored your loan, i.e. the Department of Education

Collectors - these are companies who specialize in debt collections, usually your loan is sent to collections if it is in default.

Default - means failing to make your payments as agreed

Most student loans are guaranteed student loans, which means that they are government backed. Loans that are guaranteed by the government and loans that are provided in whole or in part by nonprofit organizations are NOT DISCHARGEABLE in bankruptcy unless you can prove that paying them would be a hardship on you and your family. A Hardship Exemption in bankruptcy is extremely hard to get. Finally, private loans from private companies may be dischargeable.

Even if you have a government student loan, you still have options to make your payments manageable and even cancel your loans in some circumstances.

HOW CAN I MAKE MY PAYMENTS MORE MANAGEABLE?

It is important to try and work out a manageable payment arrangement BEFORE you get into payment trouble. In some instances, the Department of Education will require that you have made at least two consecutive payments before they will agree to make a payment arrangement with you. Some options you may want to consider are:

Loan Consolidation - This option allows you to combine all of your loans together in one lump sum and have one monthly payment. This may help you to have a lower payment for an extended period of time.

Income Sensitive Repayment Plan - This option allows you to tailor your payment to your income. You will need to provide income records.

You can visit www.ed.gov on the internet for applications and more detailed information on these payment options.

WHAT WILL HAPPEN IF I STILL CANNOT PAY?

If you do not pay your student loans, you are in default. The Department of Education will usually send your loan to a collections company. The collections company will then add 25%-30% more to your loan for their fees! The Department of Education can also do the following to collect on the loan:

Intercept Tax Refund - This means they take any money you are supposed to get refunded to you at tax time. This can be a big chunk of money, especially if you qualify for the Earned Income Credit. (If you are married and your spouse DID NOT cosign on your student loan, he/she can apply to have their portion of the refund returned.)

Wage Garnishment - This means they can take money directly from your paycheck. The Department of Education DOES NOT have to have a judgment against you before they garnish your wages. They can take up to 10% of your wages on a single loan and up to 25% if you have multiple loans. Also, state garnishment exemption statutes ARE NOT applicable to federal wage garnishments for student loans, but you can agree to make payments, which may convince them to stop the garnishment. In rare circumstances you may be able to qualify for a federal hardship exemption, but they are very detailed and difficult to get and you must reapply every 6 months.

UNDER WHAT CIRCUMSTANCES COULD MY LOAN BE CANCELLED?

There are only a few circumstances in which you could cancel your federal student loan. They are:

Permanent and Total Disability - If you have been determined to have a permanent and total disability by the Social Security Administration AND you have a doctor's form stating that you cannot work, then you may qualify to have your loan cancelled.

Closed School Discharge - If, after 1/1/86, the school you attended closed BEFORE you could complete your education, you could qualify for a cancellation. You must prove that the school closed and that you were enrolled when it closed. You can find a list of closed schools on the Department of Education website at www.ed.gov.

School Received False Benefits - If the school lied to the Department of Education about your ability to attend school. For example, a school enrolls a person who they know cannot complete the education, such as a mentally challenged person, just to get the federal funds.