If you are trying to manage a student loan debt, you might be disappointed to learn that they aren't often discharged through bankruptcy, but there are other options for student loan management you could be eligible for, including loan forgiveness or cancellation, disability discharge, or forbearance. Read this article to learn which option might be best for you to pursue and other things to consider.
According to the Institute for College Access and Success, as of 2020, student loan debt amounted to $1.56 trillion in the United States. There are 44.7 million student borrowers suffering from the burden of student loans in this country. Student loans are a special category of debt with unique rules. This means that traditional debt relief options that you might use to address credit card debt or debts from personal loans won't always work with student loans.
Filing for bankruptcy or negotiating with your lender aren't likely to be good options to deal with your student loan debt. Instead, there are repayment options and forgiveness plans that may provide you with some relief.
Many Debts Are Eligible for Loan Forgiveness
There are several loan forgiveness programs available to borrowers. A popular student loan forgiveness program is the public service loan forgiveness program or PSLF. This repayment plan assists those who work in the public or non-profit sectors by reducing monthly payments and forgiving the remaining balance of student loan debt after 20 to 25 years.
To qualify for public service loan forgiveness, you must:
Be employed by a U.S. federal, state, local, or tribal government, or not-for-profit organization;
Work full-time at one of the above-mentioned agencies or organizations; and
Have direct loans or consolidate other federal loans into a direct loan.
The public service loan forgiveness program forgives the loan balance of qualifying loans after you have made 120 qualifying payments under an income-driven repayment plan.
Your loans will not generally qualify for the public service loan forgiveness program if you:
Work for a labor union, certain political organizations, for-profit organizations which include for-profit government contractors;
Work for a non-profit organization that is not tax-exempt; or
Work part time.
Teachers also have a dedicated federal student loan forgiveness program. Eligibility under the teachers loan forgiveness program is made available to teachers who:
Have had an outstanding balance on Direct Loans or Federal Family Education Loan (FFEL) Program loans as of Oct. 1, 1998, or on the date that they obtained a Direct Loan or FFEL Program loan after Oct. 1, 1998;
Have been employed as a full-time teacher, for 5 academic years after 1997-1998;
Have been employed at an elementary school, secondary school, or educational service agency that serves low-income students; and
Have taken out loan(s) before the end of their five academic years of qualifying teaching service.
Other Debts Are Eligible For Loan Cancellation
Student loan forgiveness plans are not your only option when you’re managing your federal student loans. Some student loan debt is eligible for cancellation. Loan cancellation means that you will no longer be required to repay some or all of your loan. If you are no longer required to make payments on your loan due to your job, this is generally called loan cancellation.
For example, if you have a Perkins loan, you may be eligible to have all or a portion of your loan canceled based upon the length of your employment or volunteer service. For example, up to 100% of your loan may be cancelled after five years of eligible service. Other cancellation rates may apply in accordance to your profession and length of service.
The difference between loan cancellation and loan forgiveness is the amount taxed at the time of cancellation or forgiveness. Generally, when a loan is cancelled, you’ll remain responsible for paying taxes on the amount cancelled during that tax year. When a loan is forgiven, and the loan is tied to a forgiveness program such as PSLF, you will not be responsible for paying taxes on the amount forgiven during that tax year.
There are several pros and cons to loan cancellation. The upside is those who have their loans cancelled will finally achieve financial freedom from debt. The downside is cancellation of student loans may result in a higher tax bill; planning ahead will alleviate you from the burden of a large lump sum tax payment.
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Apply For Total And Permanent Disability Discharge
You may qualify for a discharge of your federal student loan(s) if you can prove total and permanent disability. This isn’t an option available to many borrowers, nor is it easy to get a disability discharge approved. First, you must prove you in fact have a total and permanent disability. This means you are no longer able to work due to a medical condition. You may not qualify for total permanent disability so long as there are additional, curative treatment options available, making it extremely difficult to claim a total and permanent disability. You can read about Denise, and her journey to obtain total and permanent disability discharge of her student loan debt after she had injured her legs and back in a car accident and was no longer able to work - she started the three year waiting period in 2019, still awaiting discharge.
If you have been hurt like Denise, there are things you must do to discharge your student loan debt. You can prove you qualify for a total and permanent disability discharge by providing documentation from your physician, the Department of Veterans Affairs or the Social Security Administration. Proof from one of these sources must be sent with an application for discharge to your lender.
If your discharge is approved, your remaining balance will be discharged and any student loan payments made from the time your application was received to when your debt was discharged will be returned. In some instances, there will be a “three year monitoring period”, post-discharge, wherein your loans may be reinstated if your monthly income is too high or if you take out another federal student loan.
Settling Student Loans Might Not Be Worth It
If you have successfully negotiated a credit card debt or other debt, you might be wondering whether you can do the same with your student loan debt. Regrettably, most loan servicers will only consider negotiating a settlement once you have defaulted on your student loans and even then most lenders are NOT willing to settle - in particular, federal lenders. You default when you stop making payments on your loan. This will prompt your lender to start looking for ways to collect the student loan debt. One of the downsides of defaulting on your student loans is the negative impact it will have on your credit score:
Payment history is an important factor in calculating credit scores. Missed payments on your student loan, even if it is just past 30 days overdue, it can stay on your credit report for seven years.
If you have a federal student loan (which is a loan held by the federal government) that goes into default, a derogatory mark will be made on your credit report noting that the loan holder has filed a claim with the government to collect the debt.
For private loans, a collection company may buy your student loan debt, and that collection account will show up on your credit history.
Bankruptcy Probably Won’t Rid You Of Student Loans
If you have other debts in addition to your student loans, it is likely that you have also weighed the option of filing for bankruptcy. Discharging federal student loans through bankruptcy is tricky. Bankruptcy judges use the Brunner Test as a means to decide whether you can discharge your students loans through bankruptcy. The questions on the test are as follows:
Based on your current income, can you maintain a minimum standard of living for you and your dependents while repaying your student loan debt?
Is your financial situation likely to stay the same for a significant portion of the repayment period of the student loans?
Have you made a good faith effort to repay your student loans?
If a judge decides that you can maintain a minimum standard of living while repaying your student loans; your financial situation will improve during the repayment period; or you failed to make a good faith effort to repay your student loans, you will fail the test and will not be able to discharge your student loan debt through bankruptcy. This means if you fail one question, you fail the Brunner Test. As you can tell, passing this test is not easy!
However, filing for bankruptcy does come with some advantages. For one, it stops collection activities on all your debts, including your student loans. This means interest will continue to accrue, but you will not be responsible for making student loan payments while your bankruptcy case remains active. It also means that other collection efforts such as garnishments will be halted. Second, this process can empower you to get a handle on your other debts. Debts that do qualify for discharge through bankruptcy, like credit cards and medical debts, can be discharged, making your debt load more manageable. This will free up your income to handle your student loans.
Wait And See What Happens
Something exciting about current events involves the opportunity for change in the student loan world. Borrowers around the country may be affected by the constant talks of potential student loan cancellation or forgiveness going on in the federal government. As of March 2021, lawmakers have been discussing loan cancellation for student loan debt ranging from $10,000 to $50,000. Democratic lawmakers are advocating for student loan cancellation up to $50,000 for borrowers who earn up to $125,000 annually. Other lawmakers are in support of $10,000 student loan cancellation regardless of the borrower’s income.
Currently, President Biden’s proposed infrastructure stimulus plan does not include any student loan cancellation. If student loan debt cancellation does become a reality, it is important to understand that loan cancellation is tax-free for the next few years. This means that any amount cancelled will not count as taxable income and you will not have to pay taxes on it come tax time.
Until September 31, 2021, federal student loans are in forbearance. Borrowers holding federal student loans will not be required to make payments and those loans will not accrue interest. In light of the Covid-19 pandemic, this relief may be extended.
There is no quick fix for eliminating student loan debt. Exploring your options for loan forgiveness may be the slow and steady option to lift some of the burden. Depending on your situation, cancellation or discharge may provide the relief you need. In the interim, deferment or forbearance may provide a temporary solution. Either option will temporarily suspend student loan payments, but beware of interest accruing over time.