How Your Student Loan is Different Than Other Debt
If you’re having trouble repaying your debts, you may be able to find some relief through bankruptcy court—except in the case of student loans.
Qualifying education loans—that is, loans made to students, their parents or guardians, or their spouses for the purpose of paying an eligible student’s higher education costs—are treated much differently than other types of debt when it comes to default and bankruptcy. Here’s an overview.
Bankruptcy isn’t likely to solve your problem
It’s possible to get rid of student debt through bankruptcy court—but the requirements are very strict. For most people, student loans are nondischargeable—unlike other kinds of debts, including credit card debt. Even if you get all your other loans discharged, student loan debt will stick.
The one exception is proof of economic hardship. If you can show that paying off the loan would impose an undue hardship on yourself and your dependents, then you may be able to have the loan forgiven. However, the standards for eligibility are extremely high. You have to show the following:
- You have made a good faith effort to repay the loan in the past. You’ve also made a good faith effort to cut expenses while increasing your income.
- Based on your current expenses, paying off the debt would not allow you to maintain even a minimal standard of living—with “minimal” generally defined by the poverty line in your area.
- Your economic hardship is unlikely to change or improve significantly at any point in the future.
In most cases, the standards for undue economic hardship are unreachably high except for those in very unusual circumstances—for example, people with illnesses or injuries that will prevent them from ever earning a living that would allow them to make even the minimum monthly payments on their loans. In fact, among legal experts the economic hardship escape hatch is sometimes called the “iron lung exception”—meaning you have to be in an iron lung, or have a health condition equally dire that will prevent you from ever earning a living, to qualify.
Your paycheck, federal benefits and tax refunds can be garnished or intercepted. The Federal government is allowed to garnish your wages by up to 15%, as well as applying your tax refund checks and even Social Security disability and retirement payments toward your student loan balance.
While your wages can be garnished to pay for other types of debt as well, this can generally only happen once you’ve been sued and a judgment has been decided against you—except with student loans. In the case of student loan defaults, the government can garnish your wages and intercept other payments and benefits even before you have been in court.
To object, within 65 days of notice that your wages or benefits will be garnished, you have to file evidence of any of the following conditions with the guaranty agency that holds your loans:
- Your loan is already repaid.
- You have renegotiated a repayment agreement and are making payments under that—or you’ve been granted a deferment or forbearance.
- Your loan has been cancelled.
- You’ve filed for bankruptcy and are still waiting to hear the outcome of the case.
- You are completely disabled on a permanent basis.
- The loan is not yours.
- Your school owes you a refund because you left before using all the credits paid for under the loan.
- You were falsely certified as being eligible for the loan by the school you attended.
- Your school closed before you could earn a degree.
- There is another reason why your loan isn’t legally enforceable—such as your signature was forged on the loan agreement papers.
There is no statute of limitations on student loans
For most other types of debt, there is a statute of limitations that varies to state—usually between two and fifteen years. For federal student loans, however, there is no limit to the amount of time can pass between your default and the time the government decides to sue.
For private student loans, however, the situation may be different. Sometimes, depending on your loan, your state laws and other factors, your private student loans may be subjected to the same statutes of limitations that other types of debts are subject to in your state.
You pay collections fees—and commissions. The federal government may hire a collections agency to collect on your student loan debt. If they do, they’ll charge you for all the interest and the capital of the loan. They’ll also charge you for the collection fees, which can be very high—sometimes as much as 25% higher than your loan costs. In addition, collection agencies bill the Department of Education for a commission on all debt collected—and that commission is also charged to you.
Private student loans are different. Most of the points above are applicable only to federal loans—the low-interest, fixed-rate loans you get through the federal government. In most cases, private student loans are treated the same way other debt is treated—except in the case of bankruptcy court, in which private loans are still generally treated as nondischargeable debt.
Whatever you do, don’t ignore your student loan debt. Student loans are tough to get rid of, even if you’ve received a discharge ruling in bankruptcy court for your other debt. If you’re having trouble repaying your student loan, talk to your lender and see if you can arrange a deferment or forbearance—before your loan goes to collections.
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch