‘My degree did not lead to a higher income.’ Can I get rid of old student loans?
Question: I have a degree and have been paying the student loan for about 25 years. I switched to income contingent repayment in 2011. The loan servicing company tells me that since I started IDR later, instead of starting in 1997, I have to pay for about another decade for that my loans are cancelled. I had heard that after 20-25 years the loans are erased. Now the amounts keep increasing, with my salary changes, but obviously it will never end. My degree did not lead me to greater income or opportunities. Can I bankrupt my loans? I’ve heard of student loan strikes, loan defaults protesting unethical contracts, where the banks know you can’t pay them back. What should I do?
To respond: While the bankruptcy route may seem appealing from a forgiveness perspective, it’s probably not the answer to your problems (see details on your income-based repayment plan and forgiveness below). Indeed, it is very difficult to discharge a student loan in the event of bankruptcy, and to do so, it is necessary to demonstrate an undue hardship in what is called an adversarial procedure. “Undue hardship is generally interpreted to mean that you are currently unable to repay your student loans and maintain a minimum standard of living for yourself and your dependents, that this situation must be likely to persist for the major part of loan terms, and that you have made a good faith effort to explore repayment options such as income-contingent repayment, deferment, and forbearance,” says Mark Kantrowitz, student loan expert and author of Who graduated from college? Who doesn’t?.
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Student Loan Forgiveness and Income-Based Repayment Plans
You can consider loan forgiveness instead. It appears from your score that your lender thinks you might qualify. If you have worked full-time in an area of public service, directly for a government agency or 501(c)(3) or non-profit organization, you may qualify for public service loan forgiveness ( PSLF). This program cancels remaining debt after 120 qualifying payments (approximately 10 years) under an income-driven repayment plan under the Direct Lending Program. Additionally, “there is currently a limited PSLF waiver that allows payments made on FFELP loans in any repayment plan to count toward forgiveness, provided you consolidate the loans in the direct lending program and complete a form PSLF using the PSLF Helper Tool by Oct. 31, 2022,” Kantrowitz says. And note that debt remaining after 20 or 25 years of payments in an income-driven repayment plan is forgiven Here are some resources on student loan forgiveness and income-oriented repayment plans that can help you understand how to get your own loans forgiven.
Also, review and discuss with your lender the Biden administration’s new rules, announced on Tuesday. The government reviewed the income-driven repayment plans and found “significant flaws that suggest borrowers are missing progress towards canceling the IDR”. Thus, the government is conducting a “one-time review of IDR-eligible payments for all direct student loans and federally administered Family Education Loans (FFEL) program loans. All months in which borrowers have made payments will count towards IDR, regardless of the repayment plan. Payments made before consolidation on consolidated loans will also count. See details on these new rules here, and this guide will help you understand what the new rules mean.
What about refinancing your student loans?
Since you have federal loans and are on an income-driven repayment plan, you probably don’t want to refinance your student loans. However, readers who have private loans with higher rates may want to see the lowest student loan refinance rates you might qualify for here.
Beware of a Student Loan Strike
Although it may seem tempting, a student loan strike will likely only make your situation worse. If you are unable to repay your student loans, a collection fee of up to 25% may be deducted from each payment before the remainder is applied to interest and the loan balance. Additionally, the federal government can garnish your wages up to 15% without a court order, and the 15% garnishment is greater than the amount paid under an income-tested reimbursement plan. “The federal government can also offset income tax refunds and Social Security disability and retirement benefits. There is no statute of limitations for federal loans,” Kantrowitz says.
And remember that when you don’t make payments, you risk not repaying your debt, leading to a host of negative consequences, including collection charges and damaged credit. “It’s never a good idea to voluntarily default on your debt. Instead, “aim to get your payments as low as possible by signing up for an income-driven repayment plan,” says Anna Helhoski, student loan expert at NerdWallet.
Letters edited for clarity and conciseness.