Possible Help for Student Loans

It is our view that the student loan problem faced by so many Americans is one of the great injustices of our system and will sow the seeds of major political turmoil. See my article: Occupy Wall Street and Debt Jubilee. There are a few things that might help.

Programs that Might Help You with Student Loans

There is unfortunately little you can do in talking to student loan collectors. Most of the time, the debt collectors themselves really have little right to negotiate with you. The law behind student loans is that they are not dischargeable in bankruptcy absent “extraordinary” circumstances and “undue hardship,” and the cases discussing the issue have been extremely unpromising, to say the very least, about what circumstances must be in order for them to be “extraordinary.” “Undue hardship” has been interpreted to mean “no likelihood of ever being able to pay the debt,” an almost unprovable burden. On the bright side, there are increasing numbers of organizations and programs out there to help, and the lending institutions have not seemed eager to sue anybody.

One of the programs that might help you deal with student loans (not a negotiation) is an “income-based” payment (IBR) program. The plans call for a payment “cap” of a certain percentage of discretionary income and provide for loan “forgiveness” after a certain period of time. The program seems, at first sight, to be very reasonable, with a limit on payments and amount of time that will be required. They are for federal loans.

Another sort of help is available if you are doing some sorts of public or nonprofit service as your job, you may be able to get help from the federal government. Click here for the link that will take you to the government site discussing that help. This program is designed for only certain kinds of loans. Here’s what the government says about it:

Only loans you received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for PSLF. Loans you received under the Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible for PSLF.

If you have FFEL Program or Perkins Loan Program loans, you may consolidate them into a Direct Consolidation Loan to take advantage of PSLF. However, only payments you make on the new Direct Consolidation Loan will count toward the required 120 qualifying payments for PSLF. Payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count as qualifying PSLF payments.

There are serious limits to the kind of help this offers, but for some people this will be a way out of difficulty. Click here for more information.

Another, similar program, the “Pay as You Earn”  program, is, like the IBR program above, based on a type of financial hardship. The program provides for payment caps and loan forgiveness if your payments would be too much for you to be able to afford under the standards established by the program. You can find out about that here: Pay as You Earn.

For more help on student loans, you should check out the Project on Student Debt. If you aren’t sure what kind of loans you have, check out the National Student Loan Database System for Students and select “Financial Aid Review” for a list of all the federal loans to you. Click each individual loan to see who the servicer is for that loan (this is the company that collects payments from you). Remember that system shows only your federal student loans, however, and not your private or state student loans. Contact your school to see whether you have non-federal loans if you are in doubt about that, as they keep a record of them.

For more information on student loans and repayment, check out consumer finance. If you are active-duty military, there may be benefits helpful to you under the Service Members Civil Relief Act. If you’re not in the military and have private loans, you have fewer options, but take a look at: Paying for College. For an article on reducing student debt without paying for it or click here for a free ebook on ways to get rid of student loans without paying for them

One of the options we found interesting was the public service type loan forgiveness program that also helps with state or private loans

Negotiating Student Loans with Debt Collectors

Unfortunately, there’s really very little or even no negotiating with debt collectors on student loans, as we said above. There seem to be no market pressures on them to settle at all – they aren’t worried about the debt expiring, the companies that issue the debt are large and government-subsidized, and “educational loans” are one of the last great sacred cows in our country.

The positive side of dealing with student loans, however, is that while the collectors will call and bug you, somebody in the collection department usually does seem to take notice of the actual financial reality you are facing. If you tell them that you do not have the money to pay, they will often – usually even, it seems, refuse to agree to partial payments – but then they usually don’t take any type of collection action, either, and they only very rarely sue anybody. The downside here is still significant, however, as the information might very well end up on your credit report and cost you that way. And eventually the lender might get around to suing you after all if they find out you have property, so they may create problems if you own your home.

If they do sue you, the Debt Defense System can help you defend yourself and probe for any weaknesses they may have in the lawsuit as well as help you negotiate a better settlement if necessary. Although bankruptcy is a limited threat and bargaining chip, the lenders still hope to get their money back, and if you can persuade them that they have a better chance of getting more back by working with you than if they do not, they will probably negotiate with you at least a little bit.

Case Study on Student Loans – Hixson

The Choices Facing Hixson

Sometimes people wonder how their payments get out of control so quickly. And many people have a wrong idea about how interest rates on big loans work. This article is designed to help explain the choice one person made, as revealed in a bankruptcy case. This case is In re Hixson, 450 B.R. 9 (S.D.N.Y. 2011), Hixson tried to get rid of just some of his debt – the part represented by his ex-wife, who wasn’t paying, and never had paid, a cent on their joint debt.

Hixson graduated from the Julliard School of Music with a Ph.D. in clarinet in 1998. His student loans at the time were 91 thousand dollars and change. He was married to a woman about whom not much is said – but she had loans totalling about $47,500. That’s all we really know, so what follows is a mixture of guess-work and hypotheticals. But it is intended to be realistic and to show the situation the couple faced.

Let’s suppose that Hixson had several loans with an average interest rate of 7%. This is the way they’re done – every year is a different loan in most programs, and they can have different interest rates. Applying the loan calculator, this is what he faced, more or less. We’re going to guess that he had agreed to a ten-year payment plan. Using our favorite loan calculator (click here for an explanation of how to use it, if you need one), we plug in $91,000, interest at 7% and “120 payments” and we get…

He was on the hook for $1,056.59 per month. That’s pretty much, but if you have a pretty good job it would at least be possible. But who would want to? Hixson, whose degree was in clarinet, was probably counting on getting a university position. This apparently did not happen.

Now let’s consider his then-wife, who had about $47,500 in loans. We’ll just say they averaged 8% interest, and that she, too, was going to pay them over the course of ten years. Here’s what she was looking at:

She was on the hook for $576.31, so together the couple was looking at ten years of payments at a little over $1,600 per month. Again – possible if one or both were in teaching positions. We don’t know what her degree was in, or what it was. What we do know is that the couple didn’t like what they were facing, because they agreed to consolidate their loans. Let’s figure they got a slightly better rate by doing so. We’ll say that the rate on the consolidated loan was 6%, although again we emphasize we do not know what it really was. If that was so, and they kept their payment schedule to a “new” schedule of ten years, here’s what they faced:

Not much savings there, so it is possible we have got some of the numbers wrong. No matter, because what happened afterwards is really more important. In the seventeen months following this loan consolidation, Hixson made 12 payments of approximately $440 each. It isn’t clear why the payments were that size, and Hixson’s wife made no payments – then, or ever.

About 18 months after consolidating their debts, Hixson and his wife divorced. This means that they were both on the hook for the total amount due, but they were no longer married. It would appear from the case, though vaguely, that the ex-wife agreed to pay her loans, but that she never did. In any event, Hixson stopped paying, too, in December 2000. No payments were made until the Department of Education caught up with Hixson and began garnishing wages in October of 2004. They garnished him for between two hundred and six hundred dollars for a year before he declared bankruptcy. The DOE never made any attempt to collect from Hixson’s ex-wife. Hixson was not a clarinet professor – he was apparently a computer internet sales person.

After declaring bankruptcy, Hixson apparently stopped paying on the debt for another four years (although this isn’t clear). What is clear is that in December 2006, Hixson was facing a debt now totalling approximately $195,000. He tried to get it discharged.

At the time relevant to the case, Hixson was making about $40,000 take-home pay per year and living in NYC. His ex-wife had never paid a cent, and the DOE was after Hixson for it all. He faced two options: ten years of payments about $2100 per month (more than all of the money he had, after necessaries) or 21 years of $808/month payments. The bankruptcy court found that Hixson’s situation was not “undue hardship” that would allow any of the debt to be reduced. It also found that, because Hixson had not been making payments, he had not satisfied the “good-faith” test that the courts require for there to be any right to relief at all.

The Point of this Article

We do not know what Hixson did, or “how it all turned out.” We seriously doubt it turned out well for anybody other than the university which sold Hixson a nearly useless degree that took him at least six years to earn, cost whatever out of pocket (or in work) that Hixson had already paid before the case began, plus the $100,000 in loans Hixson got stuck with. Hixson’s total projected payments (not counting anything paid before the bankruptcy court’s ruling): about $350,000.  And these are after-tax dollars – so they likely imply a real cost more like $500,000.

After paying enough to buy a mansion, Hixson will, if he manages, be left with nothing but his degree. We simply wish to point out what a disaster this probably was for Hixson. Be very careful before taking on a student loan!

Link to a Loan Calculator

We have no connection to this calculator, but it will allow you to put in payment terms (number and interest rate) and determine how much money you could borrow; or it can help you take the loan principle and figure out how much you will have to pay – over a length of time you can set – to pay it off. In other words, this program lets you get a realistic handle on the amount of blood, sweat and tears your educational loan will cost. We hope it makes you take a hard look at the universities and their tuition rates.

 For Help with Student Loans

If you are either considering signing or co-signing for a student loan, or if you are at any stage in student loan repayment, you may be interested in our report on student loans.

For More on student loans and the probable political consequences, read Occupy Wall Street and Debt Jubilee.

Repaying Student Loans

The only sure way to avoid trouble with student loans is not to get into it. Be careful and know what you’re doing.

A Simplified Explanation of Student Loan Repayment

 Why they get out of control so quickly

Sometimes people wonder how their payments get out of control so quickly. And many people have a wrong idea about how interest rates on big loans work. This article is designed to help with that, and it comes in large part from our Report on Student Loans and our discussion of a case everyone considering signing up for a student loan, and especially considering loan consolidation with another person, should read carefully. This case is In re Hixson, 450 B.R. 9 (S.D.N.Y. 2011),

A Simplified Student Loan Scenario

Suppose you borrow $100 at 10% interest and you agree to make one payment per year. At the end of year one, you will owe $110. To make any progress, you must pay more than ten dollars (the interest); since it’s a student loan with a 100-year maturity, your payment is $11. It isn’t magic or fancy book-keeping. To make progress you must pay more than the interest, otherwise it gets added to the principle. Your $11 payment will reduce the total owed by only one dollar.

Times are rough, though, so you seek and get a deferment of that first payment. At the end of year 2, you now owe $121. Your $11 payment will not make any headway on the principle, but it will hold things steady. If you need a second deferment, you are now on a downward spiral – even if you make all your scheduled payments till doomsday, you will still get further and further behind.

This won’t happen. Instead, your payments will rise. After a few deferments your payments will be significantly higher and will stretch out just as far into the future as ever. In other words, deferments in which the interest continues to run are extremely dangerous and are to be avoided if possible. If you renegotiate the deal (consolidating your loans, for example), you can possibly change the payments back, but you will do this at the price of increasing the number of payments unless you can get a lower rate of interest, which is not likely for student loans.

Leverage and the Idea behind Student Loans

The idea behind student loans is simple: you pay one price for an asset that should help you in many ways over a long term. Inflation should help, too, because although your income should go up over time simply because of inflation (as well as your increasing experience), your payments will remain constant. Thus your payments should, in theory, go down relative to your income.

That’s the theory. It’s easier to see in something tangible, like a house. Suppose you buy a house for $100,000 with an interest rate of 5%. You pay $10,000 down and agree to pay $100/month for as long as it takes. If the price of the house goes up 10% in the first year, you have made a great bargain: the house is now worth $110,000. The amount you spent to get that house was only $11,200, so you have made $8,800. If your income has kept up with inflation, your hundred dollar payment will be easier to pay than it was at the start, too.

Student loans theoretically work the same way. You pay something down and take out loans for tuition, and you get a sort of two-faced asset: your education and a job using that education. The job, hopefully, is better than you would have gotten without the education, and it should also appreciate over time, so the value of your assets will rise, while inflation will reduce the real impact of your loan payments.

Not So Fast

The theory behind taking loans is easy, so why did so many homeowners go broke in the early 2000s? Because the home-buying spree, like student loans, were based on a premise that isn’t always right. The asset you buy isn’t always worth it – and prices don’t always go up. If prices go down, or if the educational asset does not result in financial gain, and if inflation is low, the leverage can cut the other way. The payments remain constant (or go up if payments are missed), while the ability to pay goes down.

And this is what has happened to so many people in the 2000s. Our Report on Student Loans discusses the way bankruptcy law has affected the equation and makes some suggestions about what to do if you are struggling with student loan payments. For help with the math of your loan, we suggest that you use a loan calculator, and you will find the link to that in the side panel. For a case study of the choices and issues facing one real person who took out student loans, please read A Case Study: The Choices Facing Hixson.

How to Calculate Student Loans

Are you considering getting a student loan? Do you have one already and happen to be considering your alternatives? You will be well-advised to use a loan calculator. This will allow you to determine the size of the payment you can live with – and we highly recommend you try not to underestimate how much misery loan payments can bring you.

How to Use the Calculator

We somewhat arbitrarily took $200 as the maximum monthly payment that would be tolerable. This number is based upon our own experience and what we’ve observed. Note that the payment schedule is for ten years. Considering what we’ve said about leverage, if you have a good job, it can make sense to make your payments over this long, or even longer, a period. But we hated every minute of ours, and the world is unpredictable, so the longer period exposes you more to the risk of losing your job or other changes. You could sign up for a longer period and make extra payments, and that is what we did.

In any event, in the example above, we chose $200 as the monthly payment, a 9% interest rate, and a ten year period (120 payments) and clicked on “calculate.” The calculator returned the “Loan Amount = $15,788.34” And so we know that we could not get a loan larger than that, on those terms without exceeding the $200 per month payment.

What if we could get a better interest rate, though? Suppose we got an interest rate of 5%? That seems almost free compared to the rates for credit cards! How big a loan could we get without going over our $200 payment ceiling?

As you can see, that yielded a loan total of $18,856.27. As we point out in our Student Loan Report, that’s about a fourth of the cost of one year at Harvard or Yale. So what if you ignored our warnings about length of payment schedule and went with a repayment period of 20 years (this would likely be half of your entire work life, so we almost hate even to mention it). How much could you borrow then?

We made the change by changing number of payments from “120” to “240.” In other words, you can borrow $30,305.06 if you agree to repay for twenty years. That’s still less than half a year’s cost of the Ivy League Schools, and under a year’s out-of-state tuition for most state universities. So let’s flex one last time, and consider doubling our acceptable payment amounts to $400 per month for twenty years. That’s way too much, in our opinion, but here are the calculations:

With a simple rate of interest, doubling the payments allows you to borrow twice as much. And so, for the price of $400 per month for twenty years, you can almost afford a year at an Ivy League school.

We deliberately presented the  information this way so that you would feel every cent and every minute. It is our belief that there are almost no circumstances where agreeing to anything like this makes sense. To see the real-life calculations facing the plaintiff (bankrupt person) in the Hixson case we refer to in our article on repaying student loans, please read A Case Study: The Choices Facing Hixson. In Hixson, the student got out of school with approximately $100,000 in debt and no job in his subject. It’s a pretty sad tale, but every person contemplating a student loan should consider it.

Link to a Loan Calculator

We have no connection to this calculator, but it will allow you to put in payment terms (number and interest rate) and determine how much money you could borrow; or it can help you take the loan principle and figure out how much you will have to pay – over a length of time you can set – to pay it off. In other words, this program lets you get a realistic handle on the amount of blood, sweat and tears your educational loan will cost. We hope it makes you take a hard look at the universities and their tuition rates.

 

More Legal Research

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Programs that may help with student loans

There is unfortunately little you can do in talking to student loan collectors. Most of the time, the debt collectors themselves really have little right to negotiate with you. The law behind student loans is that they are not dischargeable in bankruptcy absent “extraordinary” circumstances and “undue hardship,” and the cases discussing the issue have been extremely unpromising, to say the very least, about what circumstances must be in order for them to be “extraordinary.” “Undue hardship” has been interpreted to mean “no likelihood of ever being able to pay the debt,” an almost unprovable burden. On the bright side, there are increasing numbers of organizations and programs out there to help, and the lending institutions have not seemed eager to sue anybody.

One of the programs that might help you deal with student loans (not a negotiation) is an “income-based” payment (IBR) program. The plans call for a payment “cap” of a certain percentage of discretionary income and provide for loan “forgiveness” after a certain period of time. The program seems, at first sight, to be very reasonable, with a limit on payments and amount of time that will be required. They are for federal loans.

Another sort of help is available if you are doing some sorts of public or nonprofit service as your job, you may be able to get help from the federal government. Click here for the link that will take you to the government site discussing that help. This program is designed for only certain kinds of loans. Here’s what the government says about it:

Only loans you received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for PSLF. Loans you received under the Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible for PSLF.

If you have FFEL Program or Perkins Loan Program loans, you may consolidate them into a Direct Consolidation Loan to take advantage of PSLF. However, only payments you make on the new Direct Consolidation Loan will count toward the required 120 qualifying payments for PSLF. Payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count as qualifying PSLF payments.

There are serious limits to the kind of help this offers, but for some people this will be a way out of difficulty. Click here for more information.

Another, similar program, the “Pay as You Earn”  program, is, like the IBR program above, based on a type of financial hardship. The program provides for payment caps and loan forgiveness if your payments would be too much for you to be able to afford under the standards established by the program. You can find out about that here: Pay as You Earn.

For more help on student loans, you should check out the Project on Student Debt. If you aren’t sure what kind of loans you have, check out the National Student Loan Database System for Students and select “Financial Aid Review” for a list of all the federal loans to you. Click each individual loan to see who the servicer is for that loan (this is the company that collects payments from you). Remember that system shows only your federal student loans, however, and not your private or state student loans. Contact your school to see whether you have non-federal loans if you are in doubt about that, as they keep a record of them.

For more information on student loans and repayment, check out consumer finance. If you are active-duty military, there may be benefits helpful to you under the Service Members Civil Relief Act. If you’re not in the military and have private loans, you have fewer options, but take a look at: Paying for College. For an article on reducing student debt without paying for it or click here for a free ebook on ways to get rid of student loans without paying for them

One of the options we found interesting was the public service type loan forgiveness program that also helps with state or private loans

Negotiating Student Loans with Debt Collectors

Unfortunately, there’s really very little or even no negotiating with debt collectors on student loans, as we said above. There seem to be no market pressures on them to settle at all – they aren’t worried about the debt expiring, the companies that issue the debt are large and government-subsidized, and “educational loans” are one of the last great sacred cows in our country.

The positive side of dealing with student loans, however, is that while the collectors will call and bug you, somebody in the collection department usually does seem to take notice of the actual financial reality you are facing. If you tell them that you do not have the money to pay, they will often – usually even, it seems, refuse to agree to partial payments – but then they usually don’t take any type of collection action, either, and they only very rarely sue anybody. The downside here is still significant, however, as the information might very well end up on your credit report and cost you that way. And eventually the lender might get around to suing you after all if they find out you have property, so they may create problems if you own your home.