Student Loans – Debt Relief Options
Student loan debt has become a major drag on the American economy. At both public and private universities, the cost of tuition is rising at double or even triple the rate of inflation. The typical in-state student must pay more than $50,000 per year to obtain a four-year degree from an accredited public institution.
At private colleges, the picture is even bleaker. The average cost of a four-year degree from a reputable private institution now exceeds $100,000. Many elite schools charge $40,000 or more per year for tuition, fees, board and other expenses. At top-rated institutions like Harvard, Georgetown and Stanford, the total cost of a four-year education can easily exceed $200,000.
Even for-profit online colleges that advertise primarily on value and convenience are raising their per-class fees and subjecting their students to a host of questionable financial practices.
These cost pressures are fueling a frightening rise in student debt levels. Upon graduation or withdrawal from school, the average college student now carries nearly $30,000 in outstanding debts. Since this figure represents the median student-debt figure across private, public and for-profit schools, many students have significantly higher burdens of debt.
It should be no surprise that many students find themselves in dire financial straits after leaving college. Those who fail to graduate with a degree may not be able to obtain gainful employment for years after entering the job market. Given the state of the economy, even some graduates have tremendous difficulty finding employment in their chosen fields.
Without decent-paying jobs, many former students find it impossible to stay current on their mounting student loan debts. Although some student loans don’t accrue interest until their holders have graduated, this can be cold comfort for former students who simply don’t have adequate streams of income.
To make matters worse, student loans typically can’t be discharged in bankruptcy. Although these credit facilities aren’t “secured” by physical assets like homes or cars, certain government regulations exist to protect the companies and agencies that issue student loans. Under normal circumstances, these regulations place student loans off limits to the bankruptcy judges who might otherwise forgive them as part of a Chapter 13 or Chapter 7 bankruptcy filing.
In very special situations, some student loans may be eligible for discharge in bankruptcy. It should be noted that most borrowers will not qualify for such a discharge.
Unless a given borrower can demonstrate that continued repayment would constitute an “undue hardship” that would threaten his or her living arrangements or survival, most bankruptcy judges won’t even consider discharging his or her student loans. In order to meet “undue hardship” guidelines, a borrower must be chronically disabled, “unemployable” due to physical or mental health issues, or nearing retirement with little hope of receiving additional pay raises or other financial aid. Most borrowers don’t meet these preconditions.
There are two basic types of student debt: privately-issued and government-backed. Although Pell Grants technically represent a third type of student aid, they don’t need to be repaid under normal circumstances and aren’t usually grouped with other student loans.
In any event, the distinction between government-backed student loans and privately-issued loans is straightforward.
Private student loans are issued by private, for-profit banks and aren’t guaranteed by any state or federal government agencies. Although they can be issued in virtually any amount and may be disbursed directly to borrowers, they often come with higher rates of interest and may prove difficult to manage after graduation.
There are three sub-types of government-backed student loans: Stafford Loans, Perkins Loans and Direct Loans. These loans accrue interest like private loans and must be repaid according to a strict timetable. They often come with per-semester borrowing limits that may force students at more expensive private institutions to find supplementary sources of funding. The upshot is that they usually carry fair interest rates that may not kick in until well after graduation.
Government-backed student loans can’t be discharged in bankruptcy or settled through negotiation. Former students with unmanageable government-backed student loan burdens must generally enroll in a restructuring program through the federal government.
There are several such restructuring and consolidation programs. Borrowers who carry delinquent Direct and Perkins Loans may qualify for the Federal Direct Consolidation Loan program. This program provides borrowers with lower-interest debt consolidation loans that lengthen their repayment windows and reduce their monthly payments. Although these loans generally reduce their users’ total debt loads, the exact savings will depend upon the borrowers’ initial balances and interest rates.
Students who carry Stafford Loans and some Direct or Perkins Loans may qualify for so-called “income-based repayment” programs. These programs offer another form of loan consolidation that can reduce borrowers’ effective interest rates and lengthen their repayment terms.
Although the benchmark ratio fluctuates from year to year, student borrowers whose annual loan payments amount to more than 15 percent of their gross pay are generally able to qualify for income-based repayment programs. Also known as “restructuring” plans, these programs reduce former students’ monthly payments to ensure that they must pay no more than 15 percent of their income to their loans’ issuers.
It’s important to note that this arrangement might not reduce the actual amount that borrowers of government-backed student loans end up owing to their creditors. In most cases, income-based restructuring plans simply make it easier for students to afford their loans by lengthening their repayment windows.
By contrast, private student lenders will often accept settlements on past-due loans. This is because private lenders usually end up taking losses on delinquent loans in one fashion or another. Unlike the federal government, private lenders eventually sell baskets of past-due loans to collections agencies for a fraction of what they’re worth. In most cases, these lenders can get a better financial deal from a settlement.
Although no case is typical, debt negotiation companies may be able to secure deals that reduce former students’ outstanding loan balances. While it’s possible for a borrower to negotiate directly with his or her lenders, debt settlement specialists who negotiate with unsecured lenders day in and day out are well-versed in applying just the right combination of pressure and finesse. As such, they almost always negotiate deeper balance reductions than unaided borrowers.
Regardless, it’s important to remember that lenders prefer to settle these debts quickly and suffer a “known” loss. During any debt negotiation process, confidence is key.
Some private student lenders are resistant to the idea of negotiating and settling past-due student debts. Others willingly come to the negotiating table. It’s important for any borrower who wishes to attempt to reach a settlement with his or her lenders to enter the process with an open mind and realistic expectations. In the long run, patience tends to pay off in the form of dramatically reduced debt loads and healthier bank accounts.