If you graduated owing $10,000 or less in student loan debts, congratulations. This makes you the member of a very small club. Students this year graduated owing an average of $29,400 each and remember this is just the average and doesn’t include those who went on to get a Masters degree, a PhD or to become a lawyer or a doctor. One recent study found that about 40% of outstanding student loans were used to finance graduate and professional degrees rather than just bachelors or associate degrees. Graduate students actually owe an average of $57,600 each.
What to do if you owe $50,000, $100,000 or more?
If you find yourself facing this much debt it may seem hopeless. This can be one half of your life – assuming you’re actually able to find a job – and your earning power is still on the low side. As an example of how bad this can be if you did owe $50,000 at 6% and were in Standard 10-Year Repayment your monthly payment would be $550.10. And it doesn’t take a mathematical genius to calculate how much of a negative effect that would have on your life.
Sit down and analyze your situation
There’s an old poem where the fog “crept in on little cat feet.” Unfortunately, student loan debt can be the same way – it can just creep up on you. So if you’re looking at $50,000 or more in student debt the first thing you need to do is sit down and sort it out in terms of how much are federal loans versus how much are private. The reason to do this is because federal student debt is almost always easier to deal with. For example, you could switch out of Standard 10-Year Repayment and into one of the three Income-driven repayment programs or into Graduated Repayment where your payments would start low but then gradually increase every two years. On the other hand, private student loans tend to be very inflexible and it’s almost impossible to get them forgiven.
Contact your loan holders
If you have federal loans you should first contact your loan holders to see what repayment options would be available to you. If you don’t know your loan holders, look them up at http:////nslds.ed.gov. This is the national database of student loan information and it’s where you’ll be able to find everything you need to know about your federal student loans including how much you owe on each, your types of loans, when the money was disbursed and how long you will have to repay them. One of the biggest advantages of federal student loans is that regardless of which repayment program you’re on you should eventually be able to earn forgiveness. As an example of how this works if you are on Income-based Repayment and make all of your payments as required and on time then after either 20 or 25 years (depending on when you got your loan) any remaining balances would be forgiven. Of course, you could also approach any private lenders to see if you could get the terms of their loans modified due to hardship but this may not be easy. Three of the biggest private lenders – Wells Fargo, Discover and Sallie Mae – have said that they will soon offer some loan-modification programs but it is unclear as to how helpful these will be. And it’s very unlikely that will include any form of forgiveness.
Forget the bankruptcy myth
One of the biggest myths surrounding student loans is that it’s impossible to get them discharged through bankruptcy. The problem is that this belief is so widespread the vast majority of people who file for bankruptcy don’t even try to get their student loans discharged. Now, if you did borrow money to finance your education you do have a moral and legal obligation to pay back the money. But if life has thrown you a great big curveball and you can’t see any way to recover from your financial situation then bankruptcy might be your best option.
Understand the Bruner test
You could get your student debts discharged through bankruptcy if you can demonstrate you have an undue hardship. Unfortunately, the term “undue hardship” is not defined within the bankruptcy law. This means your bankruptcy court would ultimately decide what it means. In most cases it will apply the Bruner test. To pass this test you would have to demonstrate three things. First you would have to show that if you were to continue paying on the loan you would be unable to sustain a minimum standard of living. Second, you would have to show that your financial circumstances are unlikely to change in the future. And finally, you must be able to demonstrate to the court that you have made a good-faith effort to pay back your loans.
If you meet these criteria
If you believe you pass the Bruner test you will need to request that your bankruptcy attorney file what’s called an adversary proceeding. This is basically a lawsuit within the bankruptcy case itself. Technically speaking you could file an adversary proceeding yourself but due to the complex nature of these cases, it is very strongly recommended that you get a qualified bankruptcy attorney and especially one that has experience with student loan debts.
In the bankruptcy code an educational loan is described as one that was used at least in part to attend an eligible education institution. It further defines an eligible education institution as one that can participate in federal student aid programs. Some people have been able to successfully argue that because their private student loans were used to attend schools that were not eligible for federal student aid programs then the loans don’t fall under the definition of an education loan and should be discharged.
Even though it is possible to get student loan debts discharged through bankruptcy consider this carefully before filing. Federal student loans have a myriad of income-related repayment and forgiveness options so you should be able to find a repayment strategy that you could manage. Plus, a bankruptcy will stay in your credit file for up to 10 years. You might be able to get new credit in as few as two or three years after your bankruptcy but it will come at a very high cost. The reason for this is because a bankruptcy will totally trash your credit score. If you were to find yourself with a credit score of 600 or less you could end up paying as much as 18% interest on a new credit card or auto loan.
While a bankruptcy will stay in your credit file for 10 years it will stay in your personal file for the rest of your life. So it could turn up to haunt you 20 years from now when you apply for a new job and your prospective employer checks your personal history. You might remember the old athletic shoe slogan “just do it. In the case of your student loan debts the best option is to “just pay them”.