It’s a simple equation, really. Expensive College + No Jobs = Student Loan Defaults. With sky-high tuition, an anemic economy and a tight job market, America is approaching the $1 trillion mark for outstanding student debt (surpassing even credit cards). That means more and more people are having real trouble paying back their student loans.
The rules governing student loans are not so simple, however. Student loans in general are not dischargeable in bankruptcy proceedings, making them somewhat unique among loans (tax liens, alimony, child support and condo fees are also not dischargeable, among other things). There are exceptions to this rule, which we’ll address further down.
But there’s another layer of confusion when it comes to student loans in default: the difference between Federal student loans, which are guaranteed by the government, and private student loans, which can carry higher interest rates and offer fewer borrower protections than their counterpart. Again, neither can be discharged in bankruptcy (except in limited circumstances), and defaulting on either can lead to the garnishment of your wages, but there are some important differences to consider. When you’ve defaulted on a Federal student loan, the government can independently take up to 15 percent of your paycheck. Wage garnishment because of a private student loan default isn’t as simple, however. The lender must get a court order and the rules governing this type of garnishment vary from state to state. Furthermore, according to one expert with whom we spoke, lenders are somewhat unpredictable when it comes to going after people who have defaulted, as are the judges who ultimately decide these cases.
“When it comes to enforcement, a private loan is no different from credit card debt. Some lenders are suing, some aren’t and they have to win [to collect],” says Joshua R.I. Cohen, an attorney who advises people on student loan repayment options, and purveyor of TheStudentLoanLawyer.com. “There is a statute of limitation based on state law and there are some states where they are not allowed to have a wage garnishment. As long as you can agree to a payment plan, the judge usually won’t issue a wage garnishment, but that depends on the judge.”
There are also ways to fight and win these lawsuits, says Heather Jarvis, a public interest lawyer and student loan expert (her website is AskHeatherJarvis.com). “Borrowers can raise defenses to these lawsuits and win,” says Jarvis, adding, “If the lender gets a judgment, they have a specific length of time in which they can enforce the judgment, but most states allow lenders to renew this time repeatedly.” Jarvis recommends taking a look at the website StudentLoanBorrowerAssistance.org, which among other things, has a helpful article on strategies for defending against student loan default lawsuits, and protecting yourself in the event that you lose the case. Among the strategies they suggest arguing are, “That the creditor miscalculated the amount due. For example, the creditor may be seeking attorney’s fees or collection costs that are too high or possibly not allowed by law… That the creditor is collecting more than you agreed to pay… That the creditor has waited too long to sue you.”
Those who have defaulted on federal student loans have options. The Educational Credit Management Corporation is a non-profit organization that works with students, lenders and the Department of Education to help lower default rates, in addition to creating structured repayment plans for borrowers who have defaulted.
There are fewer options available to people who have defaulted on their private loans (Cohen notes that in fact, “There’s no difference between delinquency and default for private loans. They can sue you on day one so it’s a matter of semantics.”) Forbearance is one option for people with private student loans. This is when the borrower only has to make interest payments for a period of time approved by the lender. While this strategy may provide some short term relief, it actually increases the amount the borrower will pay back over time, because the principal remains unchanged and interest continues to accrue. For some private loans, forbearance is only available for a limited time over the life of the loans.
Deferment, in which the borrower makes no payments for a period of time, is another option, however its availability is limited. In the case of federally subsidized loans, the government may actually pay the interest of the loan during the period of deferment. However, for private loans, deferment may or may not be an option depending on the terms of the loan, and in the cases that it is available, interest continues to accrue and is added to the principal. Another option is to negotiate with the lender for a lower, lump sum payout. “Lenders will happily take a lump sum,” says Cohen, “but most people don’t have a lump sum—that’s why they are in default.”
There is one exception to the rule that student loans cannot be discharged in bankruptcy, however, and this applies to both public and private loans. If the debtor can prove undue hardship, then the debt might be forgiven. So how does one prove undue hardship? Well, according to a 27-year-old federal case, Brunner v. New York State Higher Education Services Corp, that is the basis for the rule, you are experiencing undue hardship if you can claim the following:
“(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.”
According to Cohen, however, the Brunner case is a tricky one when it comes to actually using it. “There’s absolutely no continuity for the Brunner standard,” Cohen says. “Even when two cases have the same facts often one case gets discharged, and another doesn’t.” He goes on to note that the third condition is a bit “loopy” because if someone hasn’t made a good faith effort to pay, they might be in really dire financial circumstances, and actually less able to pay than someone who has made an effort.