You might remember that about three years ago there was a whole bunch of people in New York City protesting income disparity. The movement came to be known as Occupy Wall Street. What, you might ask, ever happened to that movement? Well, it’s morphed into an organization called Strike Debt that has a program titled Rolling Jubilee that might be able to erase your student loan debt.
One lucky debtor in Kalamazoo Michigan woke up one day and found an odd letter in the mail. What it basically said is that, “we have good news. We got rid of some of your Everest College debt.” It went on to say that her private student loan in the amount of $790.05 had been forgiven outright by an organization called Rolling Jubilee.
About $15 million erased
Since November 2012, Rolling Jubilee has purchased and eliminated around $15 million of debt in the form of unpaid medical bills. It recently announced that it had also eradicated $3.8 million in private student loans for almost 3000 students.
How this works
While Rolling Jubilee can’t do much about federal student debt, it is able to help with private loans due to a quirk in the way debt works these days. When people stop paying on a debt it becomes delinquent. The lender usually writes off the debt after about six months and sells it off at a cheap price to a third-party debt collector. What Rolling Jubilee is now doing is buying some of this debt using donations it raises online. In most cases it’ s able to buy student loan debt for three cents on the dollar or less. Then, instead of trying to collect on the debt, Rolling Jubilee just makes it disappear.
Just a drop in the bucket
Student loan debt is now estimated to be about $1.2 trillion and more than 40 million Americans have some form of it. Rolling Jubilee understands that the number of people it has been able to help is only a drop in the bucket and doesn’t solve the actual problem. The group’s goal is to draw attention to the predicament of those millions of people that have unpaid student loans – especially loans with high interest from expensive for-profit colleges. It’s next step is to get a large number of people organized to push for policy changes that would allow debtors to get release from obligations such as student debt that they are unable to meet.
For-profit colleges have come under fire recently due to their disproportionate contribution to the $1.2 trillion in student loan debt. They’ve enrolled about 13% of all students but have been responsible for 50% of the students that defaulted on their loans. Strike Debt has deliberately targeted one of the largest, Corinthian Colleges, the company that owns Everest College and several other for-profit school chains. It was already having serious financial problems when the Department of Education put a hold on financial aid payments to the company – due to its failure to satisfy requests for information made by the Department. In fact, Corinthian Colleges currently has some 200 lawsuits pending for fraudulent practices. The Consumer Finance Protection Bureau announced recently yet another lawsuit against the company for alleged predatory lending. The Bureau’s goal in this lawsuit is obtain relief for borrowers because it believes the company misled students about job prospects, pressured them to take out private high-interest loans and then used high-pressure debt collection tactics.
Not even bankruptcy can help
One of the main reasons that Rolling Jubilee turned its attention to helping people with student debt is because these loans usually can’t be dismissed by a chapter 7 bankruptcy – whether it’s a private or federal student loan. Before 2005 it was possible to get private student loans dismissed through a chapter 7 bankruptcy just like any other kind of unsecured debt (think credit card debt). However, our Congress passed a law that year that changed the status of private student loans in a bankruptcy to be the same as that of federal loans. What this means is that if you want to have any kind of student loan discharged you must show that repaying it would cause you to experience an undue hardship.
What is undue hardship?
Most bankruptcy courts throughout the US use what’s called the Bruner test to determine undue hardship. This consists of three conditions you would need to meet in order to get your student loans discharged.
Poverty – The first is that you must able to show you cannot maintain a minimal standard of living for yourself and your dependents based on your current income while repaying your loans. In this case, minimal standard of living is not the same as a middle-class standard of living and is a much lower standard.
Persistence – Second, you must be able to show that your financial situation is likely to continue for most or all of your repayment period
Good faith – – And third, you must show you’ve made a good-faith effort to pay off your student loans.
Whatever you do, don’t default
As of 2012, 9.1% of student loan borrowers had defaulted on their loans within two years of graduating. This is up from 8.8% the previous year. And while 9.1% doesn’t seem like a significant number that translates into 375,000 borrowers. Even worse, 13.4% of borrowers defaulted within three years after they made their first payments.
Trust us when we say these people made a big mistake – especially in the case of federally backed loans.
Power that regular collection agencies would kill for
It’s not a good idea to default on any loan. But it’s especially bad to default on a federally backed student loan. Technically, you are in default on a student loan the day after you miss a payment. In reality, your debt won’t be reported to the three credit bureaus until you have missed your payments for 90 days or three months. If you have still failed to make a payment after nine months, the odds are that your debt will be turned over to a student debt collection agency. These collectors have powers that regular collection agencies would kill for. They can garnish your wages as well as your Social Security benefits without going to court. They can take part of your income tax refunds and even block the renewal of any professional licenses you hold.
There are ways to get a student debt out of default. The first of these is probably the simplest answer and that’s to just repay the loan. There are several different ways to repay defaulted loans depending on the type of loan you have. You can learn more about repaying your loans by clicking on this link.
A second way to get a federally backed student loan out of default is called loan rehabilitation. To do this, you must first agree to a reasonable and affordable payment plan and then make at least three voluntary payments. A lender must then purchase your loan. The best thing about loan rehabilitation is that if you can do it, you will get back some of the benefits that came with your original loan such as income-driven and Extended Repayment. In addition, once you get your loan rehabilitated …
- The default status on your defaulted loan will be removed
- This default status that was reported to the credit bureaus will be erased
- If your wages are being garnisheed, this will stop and …
- If the Internal Revenue Service is withholding any of your income tax refund, this will also stop.
Issues to be aware of if you are able to rehabilitate your loan successfully include the fact that your new payment may be more than what you are paying when you were rehabilitating the loan. Second, the total amount you owe may increase because collection costs may have been added to your principal balance. And finally, if your late payments (delinquencies) were reported to the credit bureaus before your loan defaulted, they will not be removed from your credit report.
The third alternative for getting student loans out of default is to get a Direct Consolidation Loan. This would allow you to pay off the balances on multiple student loans and end up with just one loan and one monthly payment. You will have a new interest rate that will be fixed for the life of the loan. And you will be eligible to choose a new repayment program such as Pay As You Earn, which would cap your monthly payment at 10% of your disposable income.