In 2020, 44.7 million students took out a total of $1.68 trillion in student loans. This year, almost 50% of students borrowed money to pay college tuition for the fall semester.
The student loan system has undergone several changes during the election season, and due to COVID-19. In August 2020, President Trump passed an order that suspended loan payments and waived interest on ED-held loans until 31st December 2020.
With all of these recent changes, many students have been experiencing confusion. To help you understand your financial situation in the wake of the pandemic, we’re here to answer some of the most common student loan questions.
Does an increase in income disqualify me from partial financial hardship?
There are four income-driven plans for repaying your student loans, which include Revised Pay As You Earn (REPAYE), Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), and Pay As You Earn (PAYE).
You can opt for the IBR and PAYE plan if you fulfill the requirements for partial financial hardship. Partial financial hardship is beneficial for students who have a low monthly income but a high debt. The Department of Education then adjusts your monthly student loan repayment, so it’s within your income amount.
An increase in your income will lead to an equal increase in your monthly repayment amount. If your monthly repayment amount equals that of a 10-year standard repayment plan, your servicer will confirm that you no longer qualify for financial hardship.
Suppose you were on either IBR or PAYE repayment plan, and you reported an increase in income during the recertification process. In that case, you may have received a letter disqualifying you from partial financial hardship funds and asking you to change your repayment plan.
However, they cannot forcibly remove you from the plan, so for IBR, PAYE and ICR, your payments are capped at the amount equal to a 10-year repayment plan. You’re still eligible for public service loan forgiveness or long-term forgiveness.
There have been multiple Congress proposals this year for student loan forgiveness, which include a $30,000 student loan forgiveness package proposed by US House Democrats. Stay up-to-date on changes to student loan forgiveness policies so you can apply for them if you are eligible.
Do I still have to pay student loans if I declare bankruptcy?
The COVID-19 pandemic has affected millions of Americans, leaving them struggling to deal with a weakened financial situation. One-in-four adults are undergoing economic hardship and can’t pay their bills, while more than 33% of US citizens have needed to take money out from their savings or retirement accounts to cover their daily expenses.
25% of adults in the US have been laid off from their jobs and are considering filing for bankruptcy. If filing for bankruptcy is your last resort, you should know that courts don’t normally forgive student loans in bankruptcy, like other debts.
However, the 10th Circuit for the US Court of Appeals has now joined several other circuit courts to rule that private student loans can be discharged in bankruptcy. In the McDaniel v. Navient Solutions case, the court concluded that educational loans are like other debts and can be discharged during bankruptcy.
The McDaniel v. Navient Solutions case was the first case that set a precedent for all other similar rulings such as the same ruling given by the Fifth Circuit in the Crocker v. Navient Solutions case.
To get your student loans discharged under bankruptcy, you need to prove that you’re suffering from severe hardship, even beyond bankruptcy. You fulfill the criteria for undue hardship if you can show that you’re unable to provide for yourself and your family’s basic needs.
However, keep in mind that most loans that courts have previously discharged have been private student loans, as they don’t have any income-driven repayment plan options.
If you have a federal student loan debt, you can opt for one of four income-driven repayment plans which will match your monthly repayment plan to your current income. These plans will make you ineligible for the undue hardship requirement, which is needed to discharge student loans during bankruptcy.
Should I apply for employer student loan benefits?
Many companies offer student loan benefits to their employees. While it may sound great initially, you need to consider the long-term effects of taking a big chunk of money from your employer to pay off your student debt.
Firstly, you might need to pay income tax on the amount offered by your employer, which means paying extra for a sum of money that your employer offered to you for free. If you plan to apply for Public Service Loan Forgiveness, you’ll need to have an income-driven repayment plan.
Income-driven plans base your monthly repayment on your taxable income, so taking money from your employer will raise your income, and this will increase your monthly repayment amount as well. In the end, you’ll be paying extra money every month to repay your student loans.
A better alternative is to ask if your employer can increase your monthly salary to help you pay off student loans. Instead of accepting a large amount from your employer yearly, request them to give you the money in monthly portions.
If your employer insists on giving a complete sum at once, ask them to forward the money directly to your servicer. But this is only helpful if you intend to pay your debt in full. Otherwise, your employer will be contributing money to a student loan which will eventually be forgiven.
About the Author
The author is a financial expert on student loans at ELFI (Education Loan Finance) — a national private lending company. He has helped several college graduates and parents strategically manage their finances to secure degrees from high-quality educational institutes across the United States.
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