Here, learn the consequences of not paying or making late payments on student loans and offers solutions to avoid default. It also provides information on the process of discharging student loans in bankruptcy and explains the criteria for discharge without declaring bankruptcy.
What happens if I don’t pay or my payments are late?
Don’t ignore a delinquency notice about your student loans. Your loan could go into default, which causes more problems, including:
- Taking money from your paycheck (administrative wage garnishment);
- Lowering your credit score, making it difficult to get loans or credit;
- Holding up your application or renewal of your professional, vocational or occupational license;
- Holding or garnishing your IRS refund; and
- A lawsuit filed against you by the U.S. Department of Education. There is no time limit or statute of limitations on this type of lawsuit.
How can I avoid a default?
Contact your lender to work out a repayment plan. Most lenders will work with you, but you have to ask. Get more information from www.studentaid.gov. Here are some options:
- Deferment or Forbearance: Deferment and forbearance are ways to temporarily postpone, lower, or stop your loan payments for a specific period of time.
- Income-Based Repayment (IBR): IBR allows you to lower your monthly payments based on your current income and expenses. Your payments can go up or down each year as your financial circumstances change. To be eligible you must not be in default and show that your payment under the 10 year standard student loan repayment is higher than what you’d pay under IBR. You can stay on the IBR plan even if your financial situation improves.
- Consolidation. You can consolidate multiple loans into one loan with a lower monthly payment, and have up to 30 years to pay, which means you’ll pay more interest overall but you’ll have more time to pay it off.
Can I discharge my student loan in bankruptcy?
Maybe. New guidance from the Department of Justice streamlines the process and gives you the information you need to know whether you can.
Student loans are excepted from discharge unless the Bankruptcy Court finds that excepting the loan would impose an “undue hardship” on the debtor and the debtor’s dependents. The undue hardship standard has been applied differently by different courts and requires an intensive factual investigation. The result has been varying results and extreme difficulty in discharging student loans.
- The law has not changed, but enforcement has. The Department of Justice and the Department of Education released new guidance for the government in handling requests to discharge federal student loans in bankruptcy effective November 17, 2022. When a debtor files a lawsuit to discharge student loans in the bankruptcy case, the debtor submits a form attestation for DOJ review. The attestation is fact-intensive and addresses all guidance factors. Read the guidance. If satisfied, the DOJ attorney will stipulate to the facts and make a recommendation to the Judge. The recommendation may be discharge, partial discharge, or no discharge. The recommendation is not binding on the Court and the Court may make its own decision.
- What should I do? If you are in a bankruptcy case, whether 7, 11, 12, or 13, contact your attorney and ask whether your student loans may be eligible for discharge under the new guidance. If you are thinking about bankruptcy, review the guidance, and discuss with your attorney what actions you may take to help ensure your student loans may discharged.
Can I discharge my student loan without declaring bankruptcy?
- If you are totally and permanently disabled and as supported by medical evidence.
- If your school falsely certified to the Dept. of Education that you could benefit from its instruction.
- If you dropped classes before the refund deadline, but your school refused the refund.
- If your school shut down while you were enrolled.
I took out a Parent PLUS loan and my child didn’t finish college. Can it be forgiven?
No. You must repay your Parent PLUS loan whether or not the student finished school. A PLUS loan may be discharged if the student or parent dies or you become totally and permanently disabled.
What happens if my school closes?
If it closes while you are enrolled or up to 120 days after you withdrew, your loans will be discharged. You are eligible if you have not completed your program of study, even if you received a diploma or certificate before the program’s completion. You will need to contact them if you have nonfederal loans through private lenders. You will have to fill out a Closed School Loan Discharge Application. Your last attendance date should be the same as when your school closed. This does not apply if you transfer your credits to another school to complete a similar program.
Is there loan forgiveness for public service employees?
Yes. The Direct Loan Program offers a 100% discharge of the remaining outstanding balance on your eligible Direct Loan after you have completed 120 monthly payments while employed full-time in a public service job.
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