A. Understanding Student Loans (13)
William D. Ford Direct loans are made directly from the Department of Education to students, without the involvement of a private lender. Prior to July 2010, there was also a federal Family Education Loan Program (FFEL), also known as the guaranteed loan program. These loans were made by private lenders and guaranteed by the government. Many of the terms and conditions for the FFEL and Direct loan programs are the same. However there are some differences in repayment options. There are still many FFEL loans in the system, but as of July 2010, no new FFEL loans are being made. More info.
Federal loans, whether through a bank/private lender or the Department of Education, are funded and tightly regulated by the federal government. Private loans are not subsidized by the government, and therefore are not regulated as closely. Borrowers should generally maximize their federal loan options before resorting to private loans. Learn more.
Banks and lenders – not Congress – set the interest rates, loan limits, terms, and conditions of private loans. They usually carry higher, variable interest rates, and lack the flexible repayment options of federal loans. More info.
Anyone who is enrolled in a degree, certificate, or other approved program at an eligible school and is a U.S. citizen or eligible non-citizen. In addition, in most cases, borrowers must have a high school diploma or equivalency. There are other criteria, including prohibitions on aid for most incarcerated students and a rule that students convicted under federal or state laws of sale or possession of illegal drugs cannot get federal student aid in certain cases. Except for PLUS loans, there are no credit checks required as long as other eligibility conditions are met.
Guaranty agencies are state or private nonprofit agencies that administer the federal guaranteed loan program. The agencies insure federal student loans against default and pay off lenders when borrowers default. They also try to collect from borrowers. Guaranty agencies will still be around for a while even though the FFEL program was eliminated as of June 30, 2010. The agencies are still servicing and collecting on their existing FFEL loans.
Consolidation is used to reduce and simplify monthly payments by rolling multiple loans into one. However, it can also lengthen the period of repayment and therefore increase the total amount you will pay in interest over the life of the loan. Learn more about the pros and cons of consolidation.
Only in rare cases, including if you have new loans to consolidate that were not included in the first consolidation loan, if you are in default on a FFEL consolidation loan or if you want to get into the public service forgiveness program.
Consolidating private loans into a private consolidation loan may be a good idea if you think you can get a better deal. However, it is very dangerous to consolidate federal loans into a private consolidation loan. You will lose your rights under the federal loan programs once you choose to consolidate with a private lender.
B. Federal Loan Repayment (13)
Yes. Borrowers with Direct Loans may change plans at any time by notifying the Department of Education. FFEL loan holders must allow you to switch at least once each year, but most will let you change more often if necessary.
Your payment goes first to accrued late charges or collection costs, then to any outstanding interest, and finally to outstanding principal. More info. for federal loans.
There are a number of income-based repayment programs to choose from depending on the type of loan you have and when it was disbursed. There is no minimum payment under most of these plans. Borrowers that take out new loans as of July 1, 2014 and certain other borrowers may also qualify for the “Pay as You Earn” plan. If you are eligible for the Pay as You Earn Plan, the “forgiveness” period will be 20 years instead of 25 years and you will be required to pay no more than 10% of your income toward federal student loans rather than 15%.
The waiting period after graduation or withdrawal from school and before repayment begins.
This is a postponement of repayment that is available only if you are not in default. The government has deferment programs for specific circumstances such as economic hardship, military service and unemployment. Interest does not accrue on subsidized loans during deferment periods.
This is a temporary postponement of repayment.
For subsidized federal loans, no. For unsubsidized loans, yes. However, this grace period “interest subsidy” was eliminated for Direct subsidized loans made on or after July 1, 2012 and before July 1, 2014.
There is a government deferment program for certain military service members as well as other programs for members of the military or National Guard serving on active duty.
You must request in writing that the extra amount be applied to principal. Learn more.
C. Private Loan Repayment (2)
There is no specific federal law that requires private loan creditors to offer relief. If you are having trouble with a private loan, you should request a copy of your loan agreement to see whether the lender promised you any particular type of relief. You can also contact your lender to try to negotiate flexible repayment and other loan modifications.
D. Student Loans and Bankruptcy (6)
Yes, but it is much more difficult than discharging other types of unsecured debt like credit cards. You have to prove “undue hardship.”
Most student loans are not dischargeable in bankruptcy unless you can prove “undue hardship”, but there are a few exceptions to this rule. More info.
In addition to filing the regular bankruptcy petition in court, you also have to file a separate case, called an adversary proceeding. Learn more.
You can reopen your bankruptcy case at any time to try to discharge the student loans. There should be no additional filing fee to reopen a case for this purpose.
The fact that you filed for bankruptcy will be on your credit report for ten years.
E. Loan Cancellation (12)
Yes, in limited circumstances. More info.
Yes. Some discharge options are only for certain federal loans. More info.
The government has developed forms for different types of discharge for you to fill out and send to your loan holder.
Yes. In most cases, loan holders are required to stop collecting once they receive a completed discharge application. You can also request forbearance so that collection stops while you are gathering information for your application. However, the government says that it has the right to continue Social Security offsets while the application is pending. You may ask for a hardship suspension.
Is evidence of a Social Security or Veteran Affairs disability decision sufficient to qualify for a student loan disability discharge?
For V.A., yes, if you have been determined to be unemployable due to a service-connected condition. For Social Security, in some cases yes as of July 1, 2013. Borrowers receiving Social Security disability benefits in the “medical improvement not expected” category can provide proof of these benefits instead of submitting a certification from a physician.
If you have federal government loans, yes. This means that your estate will not have to pay back those student loans. Survivors can apply for a death discharge to cancel a borrower’s federal student loans.
Parent PLUS loans may be discharged if the student for whom the parent received the loan dies. Also, the death of both parents with a PLUS loan (assuming both took out the loan) is grounds for the “death discharge.” The death of only one of the two obligated parents does not cancel a PLUS loan.
There is no administrative discharge for private student loans if you die. Private loan debts will be handled the same way as other debts. That means that they will be part of your estate. This estate settlement process (also called probate) varies by state. Some private lenders will use their discretion and agree to discharge loans when a borrower or co-borrower dies.
Yes, but only if the private lender has a cancellation program. Most do not, but some have announced full or partial cancellations due to death and disability.
There are several job-related discharges that will cancel all or a portion of your federal loan if you work in certain professions, such as teaching. Some states also have loan forgiveness programs.
Yes, if you are eligible for the public service loan forgiveness program. The Department of Education administers this program. You must have a Direct Loan to be eligible. Borrowers with other federal government loans can consolidate with Direct Loans in order to obtain this benefit. In order to qualify, you must not be in default and you must have made 120 monthly payments (10 years of payments) on your loans AFTER October 1, 2007. You must be employed in a public service job at the time of the forgiveness and must have been employed in a public service job during the period in which you made each of the 120 payments.
Can I get my federal loans canceled if I pay for a certain period of time, but am not working in a public service job?
Yes. The government will cancel any remaining balance if you make payments through Income-Based Repayment (IBR) or Income Contingent Repayment (ICR) for 25 years. This limit will decrease to 20 years for new borrowers starting in 2014. At this point, unless the law changes, the canceled amount will likely be considered taxable income. However, you may not have to pay taxes if for example, you can show that you are insolvent. It is a good idea to consult a tax professional for more information.
F. Default and Delinquency (9)
Delinquency means that you are behind on payments. Once you are delinquent for a certain period of time (usually nine months for federal loans), your lender will declare the loan to be in default. The entire loan balance will become due at that time.
You are not eligible for new loans and grants. The government can also seize tax refunds, garnish wages without a court order, take a portion of Social Security payments, and charge very large collection fees. Learn more.
In most cases, you have to miss nine months of payments before you will be in default.
It depends on the grounds for default listed in the loan agreement. You can usually go into default on a private loan as soon as you miss a payment. More info.
You can postpone repayment through deferment or forbearance — or with a private loan, through any other way you can negotiate with your lender. You can also try to switch to a more affordable repayment plan.
Rehabilitation requires that you make nine reasonable and affordable payments in a ten month period. You can get out of default faster through the Direct Loan consolidation program, but you must select the Income Contingent (ICR) or Income-based (IBR) payment plans. There are pros and cons to both rehabilitation and consolidation.
Sometimes, but they usually require a large lump sum payment. More info.
Yes, but in most cases, there is a time limit on how long the negative information will appear. More info.
G. Collections (10)
The government can seize tax refunds, wages, and even certain federal benefits like Social Security, all without first getting a judgment in court. In some states they can revoke professional licenses. More info.
Yes, there are some limits. For example, in an administrative wage garnishment, the government can take no more than 15% of your disposable wages. No matter what, you get to keep an amount equal to 30 times the minimum wage (now $217.50/week). With Social Security offsets, the government cannot take SSI payments. They can take Social Security disability or retirement benefits, but no more than 15% of the total benefit. No matter what, the first $750/month cannot be taken.
Yes. You have the right to request an administrative hearing. You may also be able to reduce or suspend collection if you can prove that collection will cause great hardship.
No. Private loan lenders have less collection powers than the government.
Not for collection of federal loans, but there is a time limit on private loan collection. The time limits for private loans vary by state, but are usually about six years after default.
Yes, but there are limits on how much government lenders can charge you. The amount of private loan collection fees must be described in the loan contract. More info.
The government has the right to sue, but rarely does so because there are so many ways the government can come after you without suing. Private lenders also have the right to sue and may be more likely to do so because they have fewer collection powers than the government. Learn more.
It depends on whether you are “collection proof.” This means that your assets and income are small enough to be protected by federal and state law from seizure by creditors.
H. Additional Resources (4)
The National Consumer Law Center’s Student Loan Law book contains a very detailed analysis of legal issues and student loans.
Student Loan Borrower Assistance
A Project of the National Consumer Law Center
7 Winthrop Square, 4th Floor
Boston, MA 02110
Please understand that we do not provide legal advice about individual cases. We request that users first review the information on this site and e-mail only with general questions not answered here. Unless otherwise noted, we check e-mails daily. Due to the high volume of inquiries, please be patient if it takes us a few days to respond. We ask that media requests be sent separately to email@example.com.
This web site also includes links to other resources for those who seek individualized legal advice or other help not offered here.