Student Loan Credit Strategy
Student loans are the birth child of the Higher Education Act of 1965. That law was enacted by Congress for the lofty purpose of “making college available to all students, regardless of economic status or background”. Student loans have become a monumental burden of never ending duration for many of those who take them out. Student loan credit strategy must be formulated early in the game. There is no statute of limitations on a federal student loan. At 8.3% annually tuition costs are outracing inflation by an unconscionable amount. Universities seem to take advantage of the fact that many young people harbor the delusion that the future will somehow take care of itself. Every generation must learn hard truths in its own way.
A well planned student loan credit strategy beats wishful thinking every time.
Depth of Student Loan Problem
The lack of opportunity for recent graduates has left many in an unenviable position. Nationally total student loan debt exceeds 1.5 Trillion Dollars projected to grow to 2 Trillion dollars by 2022. People aged 50 or older owed 20 percent of that total. Of those who were 50 or older about half wound up making a payment on that loan. Sometimes the payment was to proactively assist the student. Twenty five percent said they had to make the payment to prevent default.
Total student loan debt has overtaken auto and credit card debt. Student loan debt is second only to total mortgage debt. One in five student loan debtors are rated “severely behind”. Average student loan debt is $37,172.00 up from $10,000.00 in the early 90s. Nearly 25% of student loans are in delinquency or default.
- $25,000.00: median student loan debt for BA
- $45,000.00: median student loan debt for MBA
- $60,000.00: median student loan debt for Master of Art degree
- $140,000.00: median student loan debt for Law Degree
- $200,000.00: median student loan debt for MD
Student Loan Bankruptcy Discharges Rare
Bankruptcy is not an option for most student loan debtors except under special circumstances. These circumstances include undue hardship serious injury or, in very rare cases, working at a very low paying job where the pay is not likely to change. The legal bar is very high for bankruptcy relief. The law can only be changed by Congress which at this point shows no inclination to do that. The thinking appears to be that making bankruptcy easier for some will only make getting government backed student loans harder for others. Mark Mulvaney, Director of Office of Management and Budget in the Trump administration says bluntly: “We would like people to repay their debts. We think that is a fair thing to do.”
Bankruptcy applicants must demonstrate good faith efforts to repay their student loan by attempts to find a better job, a budget that does not meet the most minimal standards of living and what one judge describes as a “certainty of hopelessness” with proof that the condition is likely to persist for a significant portion of the repayment period of the loan. This combination of conditions required for student loan bankruptcy is referred to as “The Brunner test”. Success is so rare that many bankruptcy lawyers refuse to take these cases. They know they will be facing an opponent who specializes in beating back these challenges. Even sympathetic judges are bound by precedent that prevents them from opening the floodgates of student loan bankruptcy relief for any one individual. Smart student loan credit strategy means never forgetting that student loans are essentially bankruptcy proof.
It is not too well known that if you have obtained a private student loan for more than the published cost of attendance at a school the amount above that cost can be discharged in bankruptcy. This excess amount is not a student loan as defined by bankruptcy law. Other opportunities for bankruptcy student loan protection include ineligible education institutes not accredited under Title IV of the Higher Education Act of 1965 requirements under 221(d) of the Internal Revenue Code. Some expenses may not be higher education expenses. The student may not be an eligible student under the law.
State consumer protection laws are preempted by federal law. The Department of Justice jealously guards its turf protecting: “the important federal interest in cost effectively and uniformly administering and streamlining the federal student loan programs.”
Student Loan Credit Strategy
Student loan debt factors into your FICO score in the same way as any other debt. It makes no difference to FICO regarding student loan credit strategy if your loan is government or private. Deferred status receives no special treatment either positive or negative from FICO’s scoring algorithm. Past positive performance is lost to the scoring algorithm only during the period of deferment. When the loan comes out of deferment it once again calibrates.
Credit scoring wise, payment history always trumps the damage done by the sheer amount of the loan. Multiple inquiries within a 1 month period of time are categorized under special inquiry treatment logic. The multiple inquiries are treated as 1 inquiry in similar fashion to mortgages and auto loans. With average student loan indebtedness in the area of $30,000.00 the student loan process has created a burden that will be with many people for a long time.
Student Debt Ripple Effect
Postponed start up businesses, home and auto buying and all the rest of the things that must wait because of student loan debt affect us all. The ripple effect of the massive student loan burden has been felt throughout the entire economy.
Before getting started on dealing with your student loan credit strategy it would be wise to look into the “Know Before you Owe” project. This information can be found on the Consumer Financial Protection Bureau’s website.
Student loan payments must be given a priority over ordinary debt. Student loan debtors lack the nuclear option of bankruptcy. There are a few people with crippling debt besides their student loan who might consider going bankrupt to get rid of the non student loan debt to make the student loan payments manageable. The government has more bill collecting weapons than anyone else. Your local bank or credit union can’t just seize your tax refund but the government can. Your car dealer or credit card company can’t garnish your wages without a court order like the government. Student loans generally go into default if no payment is made for 270 days unless arrangements have been made with the lender or servicer like forbearance or deferment. Some private student loans may be different. Check the fine print on your contract early in the student loan credit strategy process.
One of the largest servicers of student loans, Navient, is being sued by 5 states and the Consumer Financial Protection Bureau for allegedly misleading borrowers by steering them into multiple postponements instead of income driven repayment plans. Income driven repayment plans cap payments at a percentage of a borrower’s income.
Once your student loan goes into default it will be assigned to a debt collector. You can expect to be burdened with a whole new set of fees and penalties for interest, collection fees and legal services. Defaulted private student loans and some government loans remain on your credit reports for seven years. Defaults on “Perkins” loans remain on record with the credit reporting agencies until the entire loan is paid off. Perkins loans were need based student loans for those with exceptional financial needs. The Perkins lending program closed on September 30, 2017.
Student Debtors Beware of Scams
Beware of scammers offering easy ways out of student loan debt for a fee. There are numerous ongoing lawsuits against these unscrupulous operations. If you see trouble on the horizon contact your servicer immediately. If you can’t work things out with them the government’s website listed below will offer you more options than any private organization can. Don’t let the scammers fool you with vague suggestions that they are federally authorized. Most of them do no more than help fill out the paperwork to enroll people in income driven repayment plans.
The least expensive way out of student loan debt is to simply make full payments under your 10 year plan. More time means more interest. If you are hit with an Administrative Wage Garnishment you must make 5 qualifying payments to stop the garnishment. This is a one time privilege.
There are Graduated Repayment Plans and Extended Repayment Plans where payments are fixed or graduated for loans exceeding $30,000.00.
It is wise to consult with the Federal Student Aid Ombudsman Group about your own individual situation before signing up for anything. Call (877) 557-2575.
If your student loan payments are just too much for you to bear consider the following options:
- Income based repayment: For loans guaranteed by the government lenders have to offer income based repayment. The Student Loan Forgiveness Act of 2012 addresses the national crisis of students who are financially crippled by their outstanding student loan balances. Repayment requirements are now limited to a maximum of 10% of discretionary income. Discretionary income is defined as all income after reaching 150% of the poverty line. Unemployed or ill are also eligible to enroll. Public sector or non profits are forgiven after 10 years. The Public Service Loan Forgiveness program has become a nightmare of complexity. It is poorly constructed and difficult to navigate. Under the Public Service Loan Forgiveness Program the number of payments decreases by half. Eligibility begins at 5 years or 60 payments. Private sector loans are purged after 20 years. Any balance that is forgiven after the 20 years is income as far as the IRS is concerned. How far the IRS will go in enforcing income tax collection against these forgiven balances remains to be seen.
- Obtaining a deferment or forbearance: Deferment is for those who have re-enrolled in school, are unemployed or face a financial emergency. For Federal Perkins Loans, Direct subsidized loans and subsidized Federal Stafford loans the government pays the interest which is not later added back.
These options do not eliminate the debt or stop the interest from piling up on private student loans. Forbearance can be obtained if you are in a medical or dental school residency program, have monthly student loan payments totalling more than 20% of your gross income, are involved in national or community service, are teaching in a qualifying education program or have been called up in the National Guard. Forbearance is not considered in FICO scoring.
With forbearance you are responsible for the interest during the payment suspension period. The interest can be paid during the forbearance or added to the principal when the forbearance ends. http://studentaid.gov/repay-loans/deferment-forbearance.
- Consolidate multiple loans: A consumer may get a lower interest rate or lower the monthly payments by stretching the loan out over more years.
- Teachers, police officers, firefighters, military personnel, public interest lawyers: These occupations may be eligible for full and total student loan forgiveness.
- Total and Permanent Disability Discharge: Possible for Federal Direct student loans. Standards for eligibility were eased by legislation effective July 1, 2013.
- Loan forgiveness: This program is a total mess. Circumstances where federal student loans can be forgiven, cancelled or discharged include: Disability, the closure of your school, jobs or other circumstances. Check http://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation.
- Borrower Defense Rules: Hard fought Obama era legislation relieving student loan obligations for borrowers from sketchy institutions that lured them with misleading, deceitful and predatory marketing practices. It prohibits colleges from forcing students to resolve complaints through arbitration rather than going to court. It particularly targets schools guilty of lying about grades and attendance records. Employment placement claims are carefully scrutinized as well.
Since April of 2017 mortgage lending giants Fannie Mae and Freddie Mac use the actual monthly payments of those in forgiveness or forbearance programs when calculating eligibility for their mortgages. The FHA does not at this time contemplate ultimate forgiveness 20-25 years down the road based on specific income related outstanding debt forgiveness.
The student loan crisis cuts across social class from hairdressing and tractor trailer driving schools through professional and Ivy League schools. Any kind of change in bankruptcy laws that might open up bankruptcy eligibility for student loans must come from Congress.
Partial or general student loan amnesty of some kind is wishful thinking. In a kind of reverse snobbery those who make it without student loans through high paying trades they have learned after low paying apprenticeships or workers in family businesses don’t care very much about the plight of those who are burdened by student loan indebtedness. Student loan credit strategy is the best defense.