Student Loan Discharge, Forgiveness, Student Loan Deferment, Student Loan Settlement.

Matt Berkus, Denver Student Loan Attorney, helps student loan borrowers

obtain solutions to crushing student loan debt.

If you cannot pay your student loans, hope is not lost. Options exist to help you manage your student loan debt. However, unlike with most other debts, options for solving large student loan debt are usually imperfect. As such, student loan options are geared to minimizing the short term negative impact of student loan collection while moving the case toward a long term, positive solution. Student loan debt resolution is a methodical, step by step, process treating the immediate problems (symptoms) while working on an overall, long term, cure.  

Books can be written on how to deal with student loans, so here we will provide a brief overview of available options.  

2 Types of Student Loans

The options available to address crushing student loan debt depend on the debtors type of student loan. Student loans come in two flavors.

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• Federal or State Guaranteed Loans

• Private Student Loans.

Most student loans are Federal loans. If you are unsure of the type of student loan you have, visit this website, http://www.nslds.ed.gov/nslds_SA/ (National Student Loan Data System), that system will identify your guaranteed loans.

Private student loans are loans that are not guaranteed by any federal, state or non-profit agency. However, at the loan's inception, distinguishing guaranteed from non-guaranteed loans can be difficult since the same lenders are often involved.

Federal Student Loans

Options for guaranteed loans fall into 4 categories.

• Forbearance/Deferment

• Specialized Payment Plans

• Partial or complete discharge (forgiveness)

• Settlement

Forbearance and Deferment:

These options allow a borrower to temporarily lower or eliminate her monthly payments and are good options for avoiding default. Generally, by the time I see a student loan borrower, she has exhausted all forbearance and deferment options.

Forbearance comes in two flavors, mandatory and discretionary. Generally, forbearance is short lived, less than 12 months; but each forbearance program has its own rules. Mandatory forbearance is typically associated with special programs such as Teacher Loan Forgiveness or Department of Defense Repayment plans.

Most borrowers are familiar with Discretionary forbearance; discretionary forbearance is used to deal with illness or short term financial set-backs (e.g. job loss).

Unfortunately, interest continues to accrue during the forbearance period.

Deferment:

Each guaranteed loan type has several deferment options but they generally share these common threads. You may defer loans so long as you are enrolled at least half time in an approved education program working toward a degree or certificate. Hardship deferments are available for up to 3 years for long term unemployment or underemployment. Lastly, those on active duty military service can defer student loans. Some smaller programs exist for specific circumstances.

As stated, deferments are good options for avoiding defaulting early in your student loan life cycle, but once deferments run out, that is it.

Specialized Repayment Plans

In addition to the standard and extended repayment options, and depending on which type of subsidized loan you have, three repayment plans may be available: Income Based Repayment (IBR), Income Sensitive Repayment (ISRP), and Income Contingent Repayment (ICRP). The common feature of each is that the payment amount is based on a percentage of your income and the amount you pay back is generally capped by a certain number of years. For example, depending on our income, under the IBR program, a typical borrower would pay 10% of his gross monthly income for 25 years. Any remaining balance is then forgiven.

A new program emerged December 21, 2012, Pay As You Earn (PAYU), but it is only available to those with new loans taken out as of July 1, 2014. PAYU is similar to IBR, but the repayment commitment is 20 years, not 25 years as with IBR.

Key Note: Default vs Delinquency: To be eligible for specialized repayment options, a borrower’s student loans must not be in default. Many borrowers I see are in default of their guaranteed loans. As a result, we must rehabilitate or consolidate the loans before getting an Income Based Repayment plan.

Default on guaranteed loans occurs if the borrower has missed 9 monthly payments. Delinquency is simply that the borrower is behind on payments. Repayment plans are still available if a borrower is delinquent, but such plans are not immediately available if a borrower is in default.

Partial and Complete Student Loan Forgiveness and Discharge:

Student loan discharge come in two flavors: (1) administrative discharge and (2) bankruptcy discharge.

Student loan discharge is the Lost Ark of the Covenant of student debt options, we know it exists (or existed), but it is near impossible to find. Guaranteed Loans have a few administrative discharge options if the borrower qualifies. Most of the administrative discharge options offer partial discharge. These options come in 3 categories, (1) problems with the school, (2) disability or death, and (3) career related. For example, full time teachers at low-income schools can have their Perkins Loans fully discharged (i.e career related discharge). If the school you were attending closed while you were enrolled, you may be eligible to discharge the loans incurred to attend (i.e. school related discharge).

One of our primary services is representing borrowers in obtaining partial and full student loan discharge. These options are out there, and we find them for beleaguered borrowers.

Bankruptcy discharge is possible if the borrower can prove that repaying the student loans would cause an undue hardship or if the borrower can prove that the student loan does not qualify as a real student loan.

We are not afraid to bring these cases because change takes time and the courts need to be educated that the standards laid out in the 1980’s were a product of a different era. Especially in the context of private student loans, some borrowers have nothing left to do but attempt a bankruptcy discharge. We aggressively represent debtors in these cases.

Side Note: In the author’s opinion, the Brunner test was a product of its time, and in today’s age, the Brunner test is the Dred Scott decision for student loans. The Brunner standard was laid down in 1985 by the U.S. District Court for the Southern District of New York. Ms. Brunner’s student loan debt was $9,000 (in today’s dollars that is $20,423). At that time, 1985, student loans were dischargable in bankruptcy 5 years after the loans went into repayment, and that waiting period applied to both guaranteed loans and private student loans. In 1990 Congress extended the 5 year period to 7 years. It wasn’t until 1998 that guaranteed loans could only be discharged by a showing of undue hardship.

Settlement: Despite popular myth to the contrary, federal regulations authorize settlement of student loan debt. However, the requirements are very stringent and the settlement offers are not that great. A good candidate for settlement is a borrower with relatively old student loans that have accumulated significant interest and collection charges.

Private Student Loans

Options for private student loans fall into 4 categories, but with private student loans, the options are not standardized.

• Forbearance/Deferment

• Repayment Plans

• Settlement

• Partial or complete discharge (forgiveness)

Private student loans are largely unregulated except for the regulations that apply to lending in general. Very few specific laws or rules exist related to the lending and collection of private student loans. So, most of the options available to resolve student loan debt come from the underlying Note, contract law, collections, the lender's internal policies, and bankruptcy.

Private Student Loan Forbearance/Deferment

Many private lenders have internal policies allowing forbearance or deferments. No set standards exist and as with any forbearance or deferment, it is only a stop-gap measure.

Repayment Plans:

Unlike the options available for guaranteed student loans, no pre-determined pay plans exist. Legally, private loan lenders have no obligation to work with you and provide you a more favorable payment than what the loan note dictates. However, many servicers will negotiate varied repayment options, but oft times, these payment plans are temporary.

Settlement:

Since private student loans are, well, private; settlement is on the table. Private loan servicers have a financial interest in getting paid. Generally, settlement becomes an option after years of non-payment. Settlements are must successful when we negotiate because we threaten to sue the collection agencies for violations of the Fair Debt Collection Practices act.

Private Student Loan Forgiveness and Discharge in Bankruptcy:

Private student loans can be discharged in bankruptcy for the same reasons guaranteed student loans may be discharged in bankruptcy. In short, private student loans cannot be discharged in bankruptcy but for the debtor showing an undue hardship or the loan doesn’t qualify as a student loan.

Key Note

Collection Action:

One of the main features that distinguish guaranteed loans from private loans is the available collection options. Guaranteed loans can directly garnish wages and intercept federal and state tax refunds without providing the debtor notice. Private student loans may only do so after obtaining a judgment against the debtor. Private student loan servicers must first sue the debtor and obtain a judgment to proceed to enforced collection. Moreover, the private loan servicer must do so before the applicable state’s statute of limitation expires.

Contact Denver Student Loan Lawyer, Matt Berkus today by calling 720-545-0339 to discuss if which Student Loan solution is right for you.