According to the credit reporting agency Experian, the total amount of outstanding student loans reached an all-time high in 2019, at $1.41 trillion, representing a 33% increase since 2014. The average per-student debt has also risen, approaching $40,000. See below.
|STUDENT LOANS IN 2019: A SNAPSHOT|
|$1.41 trillion||Amount of student loan debt outstanding in the United States|
|54%||Percent of college attendees taking on debt, including student loans, to pay for their education|
|$35,359||Average amount of student loan debt per borrower|
|14.4%||Percent of adults with a student loan|
|10.8%||Amount of student debt that’s at least 90 days past due or in default|
*Above Chart from Investopedia.com
These staggeringly high figures have surpassed both credit card debt (estimated $1 trillion) and auto loan debt ($1.2 trillion) by billions of dollars.
Even more terrifying is that the number of borrowers in delinquency or default is also skyrocketing. Delinquency and default on a student loan can have devastating consequences, and most people have no idea what to expect.
However, I am more of a solution-centered writer, and so although I will briefly discuss the problems associated with default (a short cautionary tale, if you will), I will focus on faster pay-off plans, and ways to avoid default in the first place.
First and Foremost – Get it Done!
Understanding your loans not only means avoiding default, it means controlling your destiny. After you graduate (and after you 6-month grace period), your lender will tell you how much they want you to pay each month. This is now the minimum amount you’ll need to pay every month to avoid delinquency and default (discussed further below).
However, you should understand how each payment is allocated, how many years it will take you to pay your balance, and how much interest you will repay over the life of the loan. This will help you decide if you can (or should) increase or decrease payments, and will enable you to financially plan for your next big life event (such as preparing to buy a home, or getting married, etc).
Let’s say you graduated with a loan balance of $40,000, which accrues interest at 6.8% (current federal rate). Your lender will automatically place you on a 10-year repayment plan (that is their default plan). Under this plan, you will pay $461 per month for 10 years (120 months), and by the end, you will have re-paid a total of $55,240 (with $15,240 allocated to interest, alone).
Consider, for a moment, increasing your payment to just $600 per month. This small jump means you’ll pay off your student loans 3 years faster, and save almost $5,000 in interest. Increase your payment to $1,000 per month and you’ll pay off your loans 6 years faster, saving over $10,000 in interest.
However, as we all know, sometimes even a minimum payment can be a hardship under the wrong circumstances. If your lender allows you to repay on an “extended plan”, your monthly payment will drop to $278 per month, but that means you will be repaying your loans for 25 years (300 months) and will pay a whopping $43,000 in interest (bringing total repayment to $83,000!)
On the other hand, defer your payments for 12 months and you’ll find a new, higher balance of $42,720, increased due to unpaid interest. Defer one more year, and your new balance will have increased to $45,625.
If you absolutely must reduce or defer your payments, for any reason(s) at all, at least make sure you understand how the new plan will affect your future finances. But the best course of action is to pay as much as you can, to reduce your interest expense and get these loans off your plate quickly.
Not able to make payments at all? Read on….
The Tragedy of Default
If you don’t pay (and don’t qualify for deferment or similar programs) you will eventually default.
“Default” occurs when you fail to make a payment for 270 days or more, but this period can vary depending on whether you’re dealing with private loans or government loans. However, long before you enter default, your loan becomes “delinquent” after you miss the first scheduled payment. Either way, this activity can be reported to the credit bureaus which will start to affect your credit score pretty quickly.
As soon as you become delinquent, a private lender will refer your account to a collection agency. It’s then their job to endlessly harass you until you cough up a payment. If collections are unsuccessful, your file may be referred for litigation, which more than likely will result in a judgment being entered against you in short order. With a judgment in place, the lender can garnish your wages, levy your bank accounts and seize your assets (such as your car or house).
However, if you default on government student loans, the situation can be much worse. Current law permit the Dept. of Education to forcibly collect without suing you first (that means little or no warning). They can immediately withhold your Federal payments (including tax refunds and social security benefits), and in an almost ironic fashion, disqualify you for programs of deferment, forbearance and income driven repayment plans (you will also no longer qualify for new student loans).
Avoid Default – Call Your Lender
This might sound obvious but the best way to avoid default is to make required payments, each month, when due. But let’s face it, if you could do that, you probably wouldn’t be reading this post.
If you’re having difficulty keeping up with your student loan payments, you need to contact your lender (or servicer) immediately, before you miss the first payment (or as soon as you miss the first payment).
When dealing with federal student loans, there are various programs available, including extended payment plans, deferment and consolidation. Information is readily available online, for example, on Navient’s website https://navient.com/in-repayment/federal-student-loans
However, before agreeing to anything, ask questions to be sure you understand the terms of your resolution, whatever it may be. For example, if they reduce your payment with an income driven plan, you will have to reapply again in 12 months. Deferments and forebearances will also have an expiration date, at the end of which you will need to be prepared to resume payments, or apply for an extension.
And again, you are likely to face a higher monthly payment after a period of deferment or forebearance, due to the accrued but unpaid interest, as discussed above. (Do the math: for every $100,000 in student loans that you defer, you can expect an increase in your balance of $6,700+/- each year)
Avoid Default – Free Up Some Money (Part 1)
Another message from captain obvious: if you can’t afford your student loan payments, you need more money. You can certainly get a second job, drive for Uber on the weekends, or sell tchotchkes on Etsy, but these are not a practical solutions for most people.
So if you can’t increase your income, you have to reduce your expenses. This can also be a very daunting and challenging task. We’ve all become accustomed to a particular lifestyle, and eliminating even one of life’s pleasures can be depressing.
That said, I always urge my clients to at least try. Take a good, hard look at your budget and identify one or two areas where you can reduce or eliminate spending.
You may not be ready to tighten the belt just yet, but if you create a budget and scrutinize your spending habits, you are already a step ahead. You may also find that making ends meet is easier than you thought.
At the end of this post, I will provide links to other of my posts about reducing spending and creating a budget.
Avoid Default – Free Up Some Money (Part 2)
If you’ve already tried freeing up cash by reducing expenses or taking on a second job, but still need a bit more, take a look at your other debts, in particular, credit cards. Credit card debt is the second largest classification of debt for most Americans. If you have a high balance (more than $5,000) and a high interest rate, chances are you’re making minimum payments and that is getting you nowhere, fast.
Whatever you’re spending on credit card debt, it will go a long way to paying down student loans if you eliminate this expense. How? Well, here are a few ideas:
- Bankruptcy: Chapter 7 is a straightforward process that eliminates 100% of credit card debt in only 4 months. The cash you were using to make minimum payments can now be used to pay down student loans.
- Debt snowball: Focus on the account with the smallest balance. Double or triple your minimum payment (or more) to pay off this balance quicker. Make only minimum payments on the other accounts. Once the smallest account is paid off, move on to the second smallest account, and repeat the process.
- Debt avalanche: Focus on the account with the highest interest rate first. Again, double or triple your minimum payment (or more) to reduce interest payments. While this might not be the fasted method, you will save money by paying less interest over time.
- Debt consolidation: Combine multiple old debts into a single new one at a lower interest rate, making payments more manageable and/or reducing the payoff period. There are a few ways to consolidate debt, including balance transfer cards and personal loans. This is only an option for people who still have “good” credit.
- Debt management plan: There are nonprofit credit counseling agencies that can help you set up a debt management plan. They work with your creditors to cut interest rates and consolidate your payments. Be very careful, however; there are many wolves in sheep’s clothing out there. Use only a credible, non-profit agency.
Stay focused on your goal, though. As you free up cash, you have to use it toward paying down student loans. In other words, stay committed to your plan, or pay the price…. in higher interest.
Avoid Default – Eliminating Student Loans Through Bankruptcy (Traditional Principles)
Before you get your hopes up, note that student loans are generally not dischargeable in bankruptcy, as per more recent legislation. That said, filing bankruptcy at the right time can still avoid (or delay) the “default” and provides options that are not otherwise available to non-bankruptcy filers.
Originally, student loan debt was fully dischargeable in bankruptcy, albeit after a five-year waiting period. In 1990 this waiting period was extended to 7 years, and limits were placed on higher income/higher-net worth borrowers. By 1998, however, the law took a drastic turn, and incorporated the limitations of 11 U.S.C. 523(a)(8) which eliminated the 7-year waiting period. By eliminating the waiting period, it allowed for a borrower to discharge their student loan debt at any time, however, only if the borrower could establish “undue hardship”.
The Bankruptcy Code does not define “undue hardship.” Rather, the courts have dictated the legal standard, the most infamous of which comes from the Second Circuit Court of Appeals. The seminal case, Brunner v. NY Higher Education Services Corp., 831 F. 2d 395 (1987), imposed a three-part standard, now known as the “Brunner Test” and is applied by Bankruptcy Courts across the nation.
Under the Brunner Test, a borrower can only discharge student loans in Bankruptcy if they establish, by a preponderance of the evidence, three crucial factors:
(1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents, if also forced to repay the student loans;
(2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and
(3) the debtor has made a good faith effort to repay the loans.
This makes for a very fact-sensitive assessment and provides broad discretion to judges in determining whether a debtor qualifies for relief from student loan debt.
While the most extreme cases have proven successful, most borrowers do not suffer from extreme enough circumstances to entitle them to a discharge of their student loans, e.g., total and permanent disability.
Avoid Default – Eliminating Student Loans Through Bankruptcy (New Concepts)
Not everyone struggling with student loan debt necessarily requires bankruptcy relief. In fact, is some cases it’s not helpful at all. As discussed above, most lenders (in particular, the Dept. of Ed.) have various programs that may alleviate the burdens of student loan debt and do not require a bankruptcy.
So why would someone still choose bankruptcy? Well, for one, not everyone is going to qualify for one of the limited programs offered by their lender. And two, if you are already in “default” of your student loans, you automatically become ineligible for many of these programs (and are susceptible to involuntary collection). The key, therefore, is to avoid default, at all costs (unless your default is strategic, but that is a discussion for another day).
However, no one knows better than I do, that avoiding default is not always an option. When life “happens” we often divert our attention and resources to the most important expenses, like rent, food, and child care. Student loans are often the first expense to take a back seat, and let’s face it, 270 days goes by in the blink of any eye.
Some practitioners have taken the position that bankruptcy, even if discharge is not available, can be used to open the gates to mediation and other forms of settlement discussion. In particular, chapter 13, by design, forces creditors to come forward and identify themselves (and their attorneys), which is sometimes half the battle. This paves the way for discussion with another professional who knows the law and understands the reality of student loan default. While there is no guarantee, of course, it sure beats calling that same 800-number and talking to the hourly desk-jockeys that answer the phone between the hours of 8 a.m. and 8 p.m.
As promised…. helpful links…
Need help creating a budget? Step-by-step instructions: https://leclawonline.wordpress.com/2019/11/08/dont-play-games-with-your-future/
Additional tips for saving money: https://wordpress.com/post/leclawonline.wordpress.com/117
Want to calculate your own “debt snowball” or “debt avalanche”? Use a simple calculator like the one provided by bankrate.com (https://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx )
Avoid Default – Don’t Borrow in the First Place
Before I sign off for the day, I’d like to remind my audience that the BEST way to avoid problems with student loans is to NOT BORROW them in the first place. Feel free to disagree with me, but first, hear me out : https://wordpress.com/post/leclawonline.wordpress.com/164
Still Struggling to Make Ends Meet??Consider the Benefits of Bankruptcy
- Eligible filers eliminate 100% of credit card debt in as little as 4 months
- Relief begins immediately upon filing (end harassing collection calls and protect yourself from lawsuits, wage garnishments and repossession)
- Start rebuilding credit immediately after filing
- Pre-filing payment plans (for legal fees and court costs) are readily available
Still unsure about Bankruptcy? Read through many frequently asked questions in one of my earlier posts: https://leclawonline.wordpress.com/2018/06/14/bankruptcy-faqs/
Dispel all of your bad notions about Bankruptcy! Read Bankruptcy Myths Debunked! in one of my earlier posts: https://leclawonline.wordpress.com/2018/12/18/bankruptcy-myths-debunked/
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