Douglas Olsen
Student loans are a significant financial burden for many, with some individuals choosing to prioritise appearances over financial stability. While federal loans have provided payment relief during the COVID-19 pandemic, the U.S. Department of Education's Office of Federal Student Aid (FSA) resumed collections on defaulted federal loans in May 2023. This shift places the responsibility back on borrowers to repay their debts, with potential consequences for non-compliance. The government possesses the authority to garnish wages for federal loans, which are also protected from bankruptcy. As student loan debts continue to soar, borrowers must navigate their repayment options and understand the implications of non-payment.
| Characteristics | Values |
|---|---|
| Student loan repayment resumption date | May 5 |
| Student loan collection pause period | March 2020 to May 2023 |
| Number of borrowers | 42.7 million |
| Total student debt | $1.6 trillion |
| Number of borrowers who haven't made a monthly payment in over 360 days | 5 million |
| Borrowers' repayment assistance | FSA's Loan Simulator, AI Assistant (Aiden), extended servicer call times, and enhanced Income-Driven Repayment (IDR) process |
| Consequences of not paying federal student loans | Wage garnishment and negative impact on co-signers' credit |
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What You'll Learn
Federal student loans and bankruptcy
Federal student loans can be discharged in bankruptcy, but it is a complex process and not always a guaranteed outcome. The Department of Justice (DOJ) and Department of Education have updated their guidance, making it easier for borrowers to discharge federal student loans. However, this only applies to Direct Loans and Direct Consolidation Loans held by the U.S. Department of Education. Private student loans are generally not dischargeable through bankruptcy.
To discharge federal student loans, borrowers must demonstrate "undue hardship," which means showing that they cannot afford to repay their loans now and that their financial hardship is likely to continue. They must also prove that they have made a good-faith effort to repay the loans before filing for bankruptcy. This includes contacting the Department of Education or the loan servicer to discuss repayment options. The court will evaluate the borrower's overall financial situation, including income, expenses, dependents, and job prospects, to determine if loan repayment would cause undue hardship.
The process of discharging federal student loans in bankruptcy involves filing an adversary proceeding, which is a separate lawsuit within the bankruptcy case. The borrower must file an adversary complaint and complete an attestation form outlining their income, expenses, and payment history. The judge's decision on discharging the loans will depend on the type of bankruptcy case filed (Chapter 7 or Chapter 13). If the borrower cannot meet the undue hardship standard, there are alternatives to discharging federal student loan debt outside of bankruptcy, such as applying for forbearance, deferment, or loan rehabilitation.
While bankruptcy can provide a fresh start for those struggling with federal student loan debt, it is considered a last resort due to its potential impact on credit scores and the costs and time involved in the filing process. It is important for borrowers to carefully consider their financial situation and explore all debt relief options before pursuing bankruptcy.
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Wage garnishment
In the United States, the government can garnish wages for federal student loans. The Education Department can withhold up to 15% of defaulted borrowers' disposable income, federal benefits, and their entire federal tax refunds. This can significantly impact an individual's financial situation, especially if they are already struggling financially.
For example, Jason Collier, a special education teacher in Virginia, expressed concern about potential wage garnishment due to his inability to keep up with student loan payments while also raising two children and managing medical expenses from a cancer diagnosis. He stated that if his wages were garnished, it would create further financial difficulties for him.
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Loan repayment plans
Repaying student loans can be a daunting task, but there are several loan repayment plans available to help ease the burden. Here are some of the most common loan repayment plans:
Standard Repayment Plan
The standard repayment plan is often the best option if you can afford it. It involves making equal monthly payments for a fixed term, usually 10 years. With this plan, you will pay less in interest over time compared to other federal repayment plans. Additionally, you will pay off your loans faster. This is the plan borrowers are automatically placed in when they enter repayment.
Income-Driven Repayment (IDR) Plans
If you're struggling to meet the monthly payments of the standard plan, an IDR plan may be a better option. IDR plans tie the amount you pay to a portion of your income, making them more manageable. The government offers four types of IDR plans:
- Income-based repayment
- Income-contingent repayment
- Pay As You Earn (PAYE)
- Saving on a Valuable Education (SAVE)
Payments under IDR plans are typically set at between 10% and 20% of your discretionary income and can be as low as $0 if you're unemployed or underemployed. The term of IDR plans is usually 20 or 25 years, and at the end of the term, you may be eligible for income-driven loan forgiveness for any remaining debt.
Graduated Repayment Plan
The graduated repayment plan starts with lower monthly payments that gradually increase every two years. This plan has a total repayment period of 10 years.
Extended Repayment Plan
The extended repayment plan also starts with lower payments, increasing them every two years, but over a longer period of 25 years.
It's important to remember that any option that decreases your monthly payments will likely result in paying more interest overall. Additionally, if you have federal loans, they are protected from bankruptcy, and the government can garnish your wages if you fail to make payments.
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Defaulted federal student loan collections
Defaulting on a federal student loan has serious consequences. Firstly, it is essential to understand the difference between delinquency and default. A delinquency period begins on the first day after a borrower misses a payment. During the first 15 days, the loan holder must send at least one written notice or collection letter. The notices and other tactics get more aggressive the longer the delinquency continues. If the borrower does not make a payment for nine months, the loan holder will declare the loan to be in default.
Once a federal student loan is in default, the government's extraordinary collection powers kick in. The entire loan balance becomes due, and the borrower is responsible for additional charges and costs. These include "reasonable collection costs," which can include lawyer fees, collection agency charges, and court costs, among other expenses. Collection charges are deducted from all voluntary and most involuntary payments on a defaulted federal education loan. The U.S. Department of Education has significant power to force borrowers to repay defaulted federal education loans, including administrative wage garnishment.
Borrowers who are struggling to make payments should contact their lender as soon as possible. It is possible to work with the loan holder to postpone payments or figure out another way to get temporary relief. There are a lot of options for payment relief in federal loans, and many people have had indefinite loan payment holds during the COVID-19 pandemic.
The U.S. Department of Education has taken steps to assist borrowers in getting back into repayment and avoiding default. This includes a comprehensive communications and outreach campaign to ensure borrowers understand how to return to repayment or get out of default. Borrowers can also find detailed information to help them get out of default at StudentAid.gov/end-default.
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Student loan forgiveness
The Public Service Loan Forgiveness (PSLF) program is one option. This program allows those who have made 120 qualifying payments (10 years' worth) while working for a qualifying public service employer to have their federal Direct Loans forgiven. Qualifying employers include government agencies (federal, state, local, or tribal) and certain non-profit organizations. Public service employees such as firefighters, police officers, and nurses can benefit from this program.
Another option is an Income-Driven Repayment (IDR) plan. These plans cap monthly payments based on income and family size, and the remaining balance may be forgiven after 20 or 25 years of repayment. This option is available for most federal student loans, and the Department of Education has made changes to bring borrowers closer to forgiveness. Borrowers with Direct Loans or federally-managed FFELP loans will benefit from a one-time IDR adjustment without needing to take any action. Those with FFELP loans held by commercial lenders or Perkins loans not held by the Department of Education can consolidate into Direct Loans to benefit from this adjustment, but they must do so by June 30, 2024.
It is important to note that student loan forgiveness is not a quick or easy process and requires careful attention to detail. Additionally, no fees should be paid to receive credit toward forgiveness, and any such request is likely a scam.
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Frequently asked questions
If you have federal loans, the government can garnish your wages and you will be stuck with the debt until it is paid off. The U.S. Department of Education's Office of Federal Student Aid (FSA) resumed collections of defaulted federal student loans in May 2023, after a pause since March 2020.
There are options for payment relief, such as indefinite loan payment holds, and resources to help borrowers select the best repayment plan. The FSA also offers an enhanced Income-Driven Repayment (IDR) process, which simplifies enrollment and eliminates the need for annual income recertification.
Any cosigners will be equally responsible for the debt. If you don't pay, they may be forced to pay even if they didn't benefit from the loan.
While there have been discussions about loan forgiveness, the executive branch does not have the authority to wipe away student debt. The Biden-Harris Administration has, however, kept the collections pause in place since 2023, delaying repayment for many borrowers.
It's important to understand your repayment options and seek resources and support. The FSA provides information and tools like the Loan Simulator and AI Assistant to help borrowers. You can also explore income-driven repayment plans and consider seeking assistance from financial advisors or loan counselling services.
