How to lower your student debt

What can you do if you can't make payments?

POSTED: 8:51 AM Sep 03 2013   UPDATED: 2:35 AM Sep 04 2013
Student loans

By attorney Tina Caraballo, Special to THELAW.TV

You lost your job in 2008 and eagerly signed up for retraining. With promises of employment, you began learning a new career field and incurred thousands of dollars of student loan debt. Now it's 2013, you have a beautiful framed degree, but no job and mounting debt, including the unpaid student loans. While it is of little comfort, you are not alone.

Recent data from the Federal Reserve shows that student loan debt accounts for the majority of non-mortgage household debt, passing credit cards, auto loans, and other loans.

Reasons for the increase in student loan debt include increased education costs, dwindling job opportunities, and stagnant wages. The looming crisis is the inability of unemployed or low paid graduates to ever repay their crushing student loan debt.

Is there any relief in bankruptcy for the student loan debt? Probably not. Student loan debt is non-dischargeable in bankruptcy unless the debtor is able to demonstrate re-payment would impose undue hardship on you and your dependents. In making the determination, the bankruptcy court uses a three-part test to determine hardship: (1) repayment will not allow you to maintain a minimal standard of living, (2) that the hardship will continue for a significant portion of the repayment period, and (3) that you made good-faith efforts to repay the loan before filing for bankruptcy. The majority of the reported opinions allowing student loans to be discharged are related to medical issues. Others include elderly people with limited incomes and no chance of increasing earnings. In some instances, the court orders the lenders to agree to partial repayments and repayment on better terms than available through the conventional programs.

Not paying your student loans may result in unexpected consequences. Many employers consider credit in making hiring decisions, so your student loan default may cost you a job. If you are lucky enough to land the job, the government may garnish your wages and keep your income tax refund. Social Security disability and retirement benefits may also be offset. Perhaps most shocking, in 1991 the government removed the statute of limitations on its ability to collect defaulted student loans, which means they can come after you for as long as you are alive.

So what help is available if you are unable to make payments?

-- Deferment: A period during which repayment of the total sum of the loan, interest, and any interest that has capitalized is temporarily delayed.

-- Forbearance: Allows you to stop making payments or reduce your monthly payments for a period of 12 months.

-- Changing repayment plan: Depending on your qualifications, this can help you obtain lower payments.

-- Cancellation: In certain limited circumstances, your student loans can be canceled, forgiven, or discharged. For example, if you are totally and permanently disabled, you may be relieved from having to repay your federal student loans. Some teaching and public service jobs qualify for loan discharge. Discharge may also occur if the school closes or falsely certifies your eligibility to receive the loan. Your student loan debt is discharged upon your death as well.

Other than the conventional options set forth above, what can be done? On Jan. 23, 2013, Sen. Dick Durbin introduced a bill (S. 3219) that would allow private student loan debt to be discharged in bankruptcy like any other private debt, as it was prior to 2005. While this only pertains to 20 percent of the outstanding student loan debt, it is a step in dealing with the crisis. A workable income-based repayment alternative has also been proposed (the current income-based option has been described as "mind-numbing in its complexity").

Another proposal floating around is to create classes of student loan debt. One class would not be dischargeable in bankruptcy and the other would be dischargeable. The class of the loan would be tied to the institution's history of placing its graduates in jobs. Still others advocate addressing the debt-based education system that is the root of the problem. The ultimate resolution will likely include aspects of all the proposals.

The author, Tina L. Caraballo, is the founder of the Caraballo Law Firm, P.L., a Florida based law firm that assists clients in achieving a fresh start through bankruptcy.