A. Understanding Student Loans
- What type of loan do I have?
- What’s the difference between the two federal loan programs (FFEL and Direct)?
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.
- What’s the difference between federal and private loans?
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.
- Who is eligible to take out federal student loans?
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.
- How do I know if I should consolidate?
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. In the past, many borrowers consolidated their federal student loans to save money on interest payments. This “benefit” was not as great after 2006 when interest rates became fixed. You may lose some rights by consolidating. This is most clearly a problem if you consolidate federal loans into a private consolidation loan (you would lose the rights associated with federal loans).
- Can I consolidate with the government more than once?
- Is it a good idea to get a private consolidation loan?
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.
- What are the terms and conditions of Stafford loans?
Stafford loans are for undergraduates, graduate and professional students attending school at least half-time. The fixed interest rate for undergraduate Stafford loans first disbursed on or after July 1, 2019 and before July 1, 2020 is 4.53%. The rate for graduate students is 6.08%. Most older loans from before July 2006 have variable interest rates. After 2007, the interest rates are fixed, but change almost every year. The Department of Education web site has information about the fees the government charges when you take out a Stafford loan.
- What are the terms and conditions of Perkins loans?
Perkins Loans (formerly called National Direct Student Loans, and before that National Defense Student Loans) are low-interest loans for both undergraduate and graduate students with exceptional financial need. Perkins Loans are originated and serviced by participating schools and repaid to the school. The government does not insure the loans, but instead provides money to eligible institutions to help fund the loans. If you default on a Perkins loan, it is usually the school that will come after you to collect. In some cases, the school will assign a Perkins loan to the Department of Education. In 2015, Congress chose not to keep the program. Then, in December 2015, President Obama signed a law temporarily extending the Perkins loan program for two years for eligible undergraduates and one year for eligible graduate students. The Department posted information about the winding down of the Perkins program.
- What are the terms and conditions of PLUS loans?
PLUS loans come in two varieties: 1) Parent PLUS loans are for parents borrowing for the education of dependent undergraduate children enrolled in school at least half time and 2) “Grad PLUS” loans are available for graduate and professional students. For PLUS loans first disbursed on July 1, 2019 and before July 1, 2020, the interest rate is 7.08%. The Department of Education web site has information about the fees the government charges when you take out a PLUS loan.
- Do I need good credit to borrow a student loan?
B. Federal Loan Repayment
- ICYMI: President Trump Vetoed Congress’s Bipartisan Vote to Repeal Department of Education’s 2019 Regulations
On March 11, 2020, Congress passed a bipartisan resolution to preserve student loan borrower protections put in place in 2016 (often called the “borrower defense rule or rules”) and to overturn new rules from the current U.S. Department of Education (“the Department”) that would strip away those protections and make it nearly impossible for borrowers harmed by school misconduct to get relief.
But, late Friday afternoon, President Trump vetoed Congress’s bipartisan resolution. Unfortunately this means that the harmful new rules preventing student borrowers from getting relief will likely go into effect as scheduled on July 1, 2020.
The new rules, published in September 2019, were harshly criticized by student borrower advocates because they put debt relief out of reach for many students harmed by school misconduct or closures. The rules give schools the green light to use unfair and predatory recruiting practices to exploit potential students for their financial aid money.
The Education Department predicted that harmed students would receive $512.5 million less in student loan relief each year under its new rules. And, the rules allow schools to hide their misconduct by using forced arbitration clauses within enrollment contracts to keep students’ complaints of illegal conduct out of court. Congress recognized that these new rules would hurt students and taxpayers and, with bipartisan support, passed legislation pursuant to the Congressional Review Act to strike the new rules so that the more effective 2016 regulations would be left in place.
President Trump’s veto of that bipartisan legislation means that the new rules will likely go into effect July 1, impacting the future of higher education and borrowers’ rights. Most of the changes to student relief rights will only apply to new loans first disbursed on or after July 1, 2020, meaning borrowers taking on new loans will be heavily impacted by this rule. A summary of how the new rules will limit borrowers’ rights is available here. Other rules will continue to apply to federal loans borrowed prior to July 1, 2020; information about relief for these older loans based on school misconduct or closure is available on our website.
But some changes will kick in sooner and may hurt student borrowers who already have student loans. The implementation of the new rules will have two immediate consequences for borrowers who already have loans and who have been harmed by their school.
First, the new rules roll back student borrowers’ rights to have their federal student loans automatically cancelled if their school closes after July 1, 2020, but before they can complete their studies. The 2016 regulations currently in effect protect students by automatically discharging or cancelling the federal student loan debt of students who were not able to complete their program of study because their school closed, as long as they did not re-enroll in the same program at another school within 3 years. But under the new rules, students attending any school that closes after July 1, 2020, will be stuck with their loans unless they proactively seek out and apply for a closed school discharge.
The timing of this regulatory change is particularly problematic, as there may be a wave of school closures coming due to the COVID-19 crisis, and many harmed students will be left with student loan debt and no degree or job. Sadly, many students are unaware that they can apply to cancel their federal loans after their school has closed, and some only realize their eligibility for a discharge after they consult a student loan lawyer. In too many parts of the country, there is limited or no access to student loan lawyers, especially for low-income borrowers. (We have a list of student loan lawyers for low-income borrowers on our website.) As a result of the regulatory rollback, thousands of borrowers will struggle while carrying unaffordable debt that should have been automatically discharged.
Second, the new rules roll back provisions that protect students’ right to their day in court when schools commit misconduct. The forced arbitration provisions, passed as part of the 2016 borrower defense rule, require that if schools choose to participate in the federal student loan program, then they have to agree to give students access to the courts to hold the school accountable for any illegal conduct relating to their federal loans. The Department’s new regulations struck those provisions. This means that, after July 1, 2020, schools may opt to resume their use of forced arbitration clauses in contracts with students and force students into the secretive world of arbitration without facing any consequences from the Department.
The CARES Act provides limited, temporary relief for some federal student loan borrowers, but it was silent on the issues affected by the new rules. After July 1, 2020, borrowers will have a significantly more difficult time getting a just outcome when their school has harmed them.
Congress, which stood up for student borrowers in a bipartisan way in attempting to stop these new rules from going into effect, should not submit to defeat in the face of the President’s veto. Congress still can and should protect students by voting to override the veto, and by enacting legislation to further protect America’s students from the devastation of predatory school fraud and closures.
- How can I make payments relative to my income?
There are a number of income-driven repayment plans to choose from depending on the type of loan you have and when it was disbursed.
- Can I switch to a more affordable repayment plan?
Yes. Borrowers with Direct Loans may change plans at any time by notifying their servicers. FFEL loan holders must allow you to switch at least once each year, but most will let you change more often if necessary.
- What does my payment cover?
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.
- How do I get back into repayment if I have defaulted on a federal loan?
- How is interest calculated?
Interest on all federal loans is calculated on a simple daily basis. The Department of Education’s web site includes detailed information to help borrowers understand interest rates on federal student loans.
- What is a grace period?
A grace period is the waiting period after graduation or withdrawal from school and before repayment begins.
- How can I postpone repayment?
- What is a deferment?
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.
- What is forbearance?
This is a temporary postponement of repayment.
- Does interest accumulate during forbearance?
- Does interest accumulate during deferment and grace periods?
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.
- Is repayment relief available for military service?
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.
- How do I pay extra to reduce principal?
You must request in writing that the extra amount be applied to principal. You have the right to pay off the loan as fast as you can without a penalty. As the CFPB advises: If you can afford it, paying a little extra each month or making a lump sum payment towards your principal is a great way to lower the total cost of your loan. Not only do you pay down your debt faster, but you save money on interest charges over time. The CFPB also warns about servicers that may not follow your instructions and advises borrowers to contact your servicer if you regularly pay extra toward your loans through automatic payments and ask to establish a standing instruction on your account so your extra money goes to, for example, your most expensive loan-generally the loan with the highest interest rate. You can also provide instructions with individual payments.
C. Private Loan Repayment
- Is repayment relief available for private loan borrowers?
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.
- Do private loans have flexible repayment plans?
Most do not, but it depends on the lender. Some private lenders also offer deferments on private student loans.
D. Student Loans and Bankruptcy
- Is it possible to discharge student loans in bankruptcy?
Yes, but it is much more difficult than discharging other types of unsecured debt like credit cards. You have to prove “undue hardship.”
- Are all student loans treated the same in bankruptcy?
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.
- How do I apply to discharge student loans in bankruptcy?
In addition to filing the regular bankruptcy petition in court, you also have to file a separate case, called an adversary proceeding. Learn more.
- What if I already filed bankruptcy, but my student loans weren’t discharged?
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.
- Should I consider Chapter 13 bankruptcy?
In some cases, yes. In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship.
- How long does bankruptcy information stay on my credit report?
The fact that you filed for bankruptcy will be on your credit report for ten years.
E. Loan Cancellation
- More Dream Center Students Can Now Get Closed School Discharges
By: Senya Merchant and Alex Elson of the National Student Legal Defense Network (Student Defense)
This post originally appeared as an article on defendstudents.org and has been edited into a studentloanborrowerassistance.org blog post. Borrowers seeking further assistance may contact Student Defense at firstname.lastname@example.org.
Following lawsuits brought by former students of the Art Institute of Colorado, the Illinois Institute of Art, and the Art Institute of Michigan, the Department of Education recently agreed to expand eligibility for cancellation of federal student loans for former students of these schools. It did so by extending the time period that students would be eligible for a “closed school discharge.”
This post offers information on closed school discharge eligibility for students who attended Dream Center-owned schools, as well as Parent PLUS borrowers who took out loans for such students. The Department of Education extended the eligibility date to qualify for closed school relief depending on which school the student attended. This is the current lay of the land:
- Illinois Institute of Art, Art Institute of Colorado, and Art Institute of Michigan: If you (or your child) attended any of those schools after they lost accreditation on January 20, 2018—and if you otherwise meet the criteria to receive a closed school discharge (including that the student did not graduate or complete a comparable program by transferring credits)—you are eligible for a complete discharge of your federal loans taken out to attend the school and a refund of payments made. You can apply today by filling out this form and sending it to your student loan servicer.
- All other Dream Center-owned schools: If you attended any other Dream Center-owned school on or after June 29, 2018—and if you otherwise meet the criteria to receive a closed school discharge (including that the student did not graduate or complete a comparable program by transferring credits)—you are eligible for a complete discharge of your federal loans taken out to attend the school and a refund of payments made. You can apply today by filling out this form and sending it to your student loan servicer.
Former students who obtained federal student loans to attend Dream Center schools in 2018 should keep in mind the following:
- Eligibility: As explained above, in order to be eligible for relief, borrowers must have been enrolled or on an approved leave of absence from the school on or after: January 20, 2018 (for Illinois, Colorado and Michigan AI students) or June 29, 2018 (for all other Dream Center-owned schools). Borrowers must also otherwise be eligible for a closed school discharge: they must not have completed their program or a teach-out for a similar program, or completed a comparable program at any other school after transferring their Dream Center credits over.
- Process: Your loan servicer is supposed to send you a notice with the above information and a copy of the closed school discharge application, but you do not need to wait to apply. Simply fill out THIS FORM and send it to your servicer.
- Beware: Borrowers should beware of third-party companies and student debt relief scams that advertise assistance with student loans, including assistance with closed school discharge. Applying for closed school loan relief is free – you just need to fill out the form linked to above. More tips on applying are available here.
HOW DID THIS CHANGE COME ABOUT?
In October of 2019, former students at the Art Institute of Colorado and the Illinois Institute of Art (which included the Art Institute of Michigan), represented by the non-profit legal advocacy group Student Defense, sued the U.S. Department of Education and Secretary Betsy DeVos in federal court in Washington DC. Court documents revealed that the Department continued to provide federal student aid to the schools after learning that they were unaccredited, and therefore ineligible to receive federal student funds.
On the eve of a deadline in the Student Defense case, the Department agreed to a central demand in the litigation: to extend the closed school discharge date back to the date the schools lost accreditation: January 20, 2018. Students who were enrolled on or after this date and are otherwise eligible for a closed school discharge can now apply for and receive a full discharge and refund of any payments made on the federal student loans used to attend those schools. This applies to both student and parent borrowers.
Borrowers seeking further assistance may contact Student Defense at email@example.com.
*Nothing in this blog post should be construed as legal or financial advice.
- Is it possible to cancel (also known as discharge) a federal student loan?
Yes, in limited circumstances. In some cases, you can cancel a loan due to serious problems with the school you attended. Other cancellations are available if you work for a certain period of time in a public service job. This includes military service members. Another category is for borrowers with serious disabilities or after a borrower dies so that the debt is not passed on to the borrower’s estate.
- Does it matter what type of loan I have?
- How do I apply for a loan discharge?
The government has developed forms for different types of discharge for you to fill out and send to your loan holder.
- Can I discharge my student loans if I am dissatisfied with the school I attended?
No, but you may qualify for a school-related discharge if the school closed while you were there or if the school falsely certified your eligibility for a loan. You may have other remedies if you were dissatisfied with your school, including state student tuition recovery funds and raising defenses to repayment based on school-related legal violations.
- Is there a discharge for military service?
- Will collection stop while I’m waiting for a reply to a discharge application?
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.
- Am I eligible for job-related loan forgiveness programs?
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.
- Can I cancel my loan if I’m working in a public service job?
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 an income driven repayment plan. Depending on the plan, the time period is either 20 or 25 years. 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.
- Will my student loan be discharged if I die?
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.
- Can private student loans be canceled?
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.
F. Default and Delinquency
- What is the difference between default and delinquency?
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.
- What are the consequences of defaulting on federal student loans?
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.
- How many payments do I have to miss before I default on a federal loan?
In most cases, you have to miss nine months of payments before you will be in default.
- How does default occur on a private loan?
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.
- How can I avoid going into default?
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.
- How do I get back into repayment from default?
- What are the differences between rehabilitation and consolidation for federal student loans?
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. There are pros and cons to both rehabilitation and consolidation.
- Will the government or private lenders ever agree to settle student loan debt?
Sometimes, but they usually require a large lump sum payment.
- Will a default or delinquency show up on my credit report?
Yes, but in most cases, there is a time limit on how long the negative information will appear. More info.
- What special powers does the government have to collect student loans?
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.
- Is there a limit on how much the government can take?
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.
- Is there anything I can do to challenge government collection actions?
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.
- Do private loan lenders have the same collection powers?
No. Private loan lenders have less collection powers than the government.
- Is there a time limit on how long student lenders can come after me to collect?
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.
- What rights do I have if a collector is bothering me?
- Can collection fees be added to my loan balance?
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.
- Will I be sued for collection on my student loan?
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.
- Will the government or lender be able to collect from me if I am sued and lose my case?
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.
- Are there special protections against collection for military service members?
H. Additional Resources
- How can I find a lawyer to help me?
There are limited legal resources to assist student loan borrowers, but some options do exist. There are organizations in every state and most communities which provide free legal help to people whose incomes fall below certain amounts.
- Does the Department of Education offer assistance?
The Department of Education has an ombudsman office to help borrowers and a number of helpful publications and other resources. The Department also posts answers to frequently asked questions from consumer advocates. The Consumer Financial Protection Bureau also has a student loan ombuds office and other student loan resources.
- Are there books about student loan problems?
The National Consumer Law Center’s Student Loan Law book contains a very detailed analysis of legal issues and student loans.