The student loan system in the United States is quite complex, and many people who have trouble paying their student loans don’t know whether the loan is guaranteed by or direct from the federal government, or whether the loan is from a private lender. In terms of how it’s handled in bankruptcy, the difference hasn’t meant a whole lot since 2005 when Congress gave private student loans the same “undue hardship” standard as federal loans. However, the repayment options differ between the two in important ways; specifically, since 2009 most federal loans have been eligible for Income-Based Repayment, which caps debtors’ monthly payments to a fraction of what they’d pay under a 10-year repayment plan depending on their incomes.
In 2010, Congress included a provision in the health care bill that would improve the terms IBR provides to student borrowers starting in 2014, but the Obama administration announced in October 2011 that it would accelerate the changes to this year via executive action. On November 1, the rules were entered into the Federal Register (PDF). Here are a few of the important changes.
(1) Monthly payments will be calculated from 10 percent of debtors’ adjusted gross incomes rather than 15 percent. According to the New America Foundation, this will create a windfall for high-earning graduate and professional school debtors, but there might not be that many of them.
(2) Before the rule was enacted, loans on IBR would be canceled, including interest, after 25 years of steady repayment. Now the limit is only 20 years. Interest accrues while loans are on IBR, but it doesn’t capitalize onto principal.
(3) These changes only apply to debtors who have one federal loan in 2012 and none before 2008.
(4) You can find more information here (PDF).
The number of student loan debtors on IBR is growing steadily and is probably more than one million at this point. Thus, if you have a federal student loan (except for parent PLUS loans) and it’s not in default, then you might be eligible for IBR and can avoid any future debt problems. Otherwise, consulting with an experienced bankruptcy lawyer can help you assess your options for dealing with your debts.
For 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 bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
