Although it’s difficult to discharge student loan debt in a New York bankruptcy, there is good news for student debtors: President Barack Obama recently acted to accelerate changes to the underused income-based repayment program for debtors with federal student loans, called pay-as-you-earn (PAYE). Going forward, many people who borrowed a federal loan before 2007 will be eligible for PAYE’s reduced monthly loan payments. As of now, though, only a couple million borrowers have enrolled in such plans, the main problem being ignorance about its availability.
The change in the repayment plan is welcome news because a week earlier, the Federal Reserve Bank of New York published a blog post discussing survey results of questions about U.S. households’ literacy on student loans. The questions were added to the Fed’s Survey of Consumer Expectations in 2013. The survey asked 1,029 respondents nationwide three questions:
If a borrower is unable to repay her federal student loan, what steps can the government take to collect the debt?
A. Report that the student debt is past due to the credit bureaus.
B. Garnish wages until the debt, plus any interest and fees, is repaid.
C. Retain tax refunds and Social Security payments until the debt, plus any interest and fees, is repaid.
The correct answer to the question is “all of the above,” but only 28 percent of the respondents gave that answer. Alarmingly, more than half of the households marked one item or none. The researchers investigated the percentage of correct answers according to the demographic information respondents provided in the survey. They found that respondents who were younger, had student loans, and were more numerate (the blog post is unclear on how this was measured) were more likely to give the correct answer to the survey.
The survey respondents did better on a question about the likelihood that a student loan could be discharged in bankruptcy. On a scale of one to five, with one being “extremely unlikely” and five being “extremely likely,” 37 percent gave the “correct” answer, one. However, 45 percent gave an answer of three or higher, indicating that households are much more optimistic about student loans’ dischargeability than is really the case.
You can read the New York Fed’s blog post here.
Student loan illiteracy is dangerous because the adverse consequences for default are substantial and student loans are difficult to discharge in bankruptcy. Hopefully, though, more debtors will take advantage of PAYE and similar repayment options that should reduce the possibility of default and debilitating payments. However, student debtors can still benefit from filing bankruptcy, particularly if they have private student loans, because the freed income from discharged debts can be applied to the remaining student loans.
For answers to more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
