The golden rule of college student loan debt is to never default. Although an unsecured debt, it is notoriously difficult to write off and defaulting on a student loan will leave fewer options. Income based repayment plans, forbearance and deferring repayment will no longer be possible. Repaying student loans at an affordable rate is the best option when disposable income is limited. It isn’t in anyone’s interest to see the borrower default so a number of different forms of assistance and guidance are now available.
Income Based College Student Loan Debt Repayment
Since the 1 July 2009, it is possible to cap each monthly student loan repayment at a more affordable rate. Hard-up college graduates are now able to pay just 15% of the amount of income they make that exceeds the federal poverty line. Whilst subject to change, the current poverty line income has been set at $16,245. This means that, if that person made $25,000 a year, a monthly repayment of just $109.44 would be necessary. If the balance hasn’t been completely cleared after a period of 25 years, the remainder will be written off. Sadly, any debt that is forgiven is treated as taxable by the IRS.
Student Loan Bankruptcy
Whilst it is possible to file bankruptcy to clear unsecured loans and unpaid credit card balances, it will rarely eliminate college student loan debt. Allowing this would open the floodgates. The only instance that it will be allowed is if a permanent physical disablement means that the borrower’s earning potential is seriously restricted. It will also be necessary to prove that repaying student loans would create serious financial hardship for a family. However, a debt free solution could be used to reduce the amount of disposable income that goes towards servicing other types of debt.
Consolidate Student Loans
Those who have multiple forms of college student loan debt may be able to consolidate. As well as simplifying finances, it may be possible to pay off student loans at a more affordable rate. Think carefully before turning federal debt into a private bank loan as the rate of interest is normally a lot lower. A reduced monthly repayment can create the illusion of being cheaper even though the rate of APR is higher.
Student Loan Forgiveness Programs
The government recognises that not every socially significant career attracts the remuneration it deserves. In order to incentivise teaching, nursing and the armed forces, there are a number of student loan forgiveness programs available. For each year of loyal service, a set percentage of college student loan debt will be eliminated. Unfortunately, the recession has meant that a number of these programs have been scaled back, but they will return once economic conditions start to improve again.
Repaying Student Loans
It is important to ensure that college student loan debt is managed within the current rules and guidelines. It is better defer repayment for up to three years as default will not make the problem vanish. The new income based repayment plan should be seriously considered as it allows a graduate to affordably pay off student loan debt and write off the remainder after a period of 25 years.
Can Student Loan Debt Be Legally Cancelled?
The National Center for Education Statistics pointed out that the cost of college is increasing at twice the rate of inflation. The cost of attending a public or private school is $13,000 and $28,000 a year, respectively. In certain professions and/or in exceptional circumstances, it may be possible to eliminate student loan debt without further repayments. This article outlines the different situations when this may be possible.
Legally Cancel Student Loan Debt
Whilst student loan repayments may be affordable when in suitable employment, things can change quickly. Non-payment for 270 consecutive days will be interpreted as default under section 435 of the Higher Education Act. Defaulting will have a number of negative ramifications for the borrower. However, it may be possible to eliminate college loan debt as part of a student loan forgiveness program or discharge it when an unfortunate set of circumstances apply.
Student Loan Bankruptcy
Since 8 October 1998, it is not possible to cancel student loan debt by filing for bankruptcy. However, the exception to this rule is if a permanent disablement affects the individual’s long term earning capability. If making repayment will cause ‘undue hardship’, it may be possible to legally cancel college loan debt. These rules apply to both student and parent borrowers.
Student Loan Forgiveness Programs
Teachers. It may be possible to clear up to $17,500 of federal student loan debt over five years. This is achieved by meeting certain requirements, such as teaching at a low-income school.
Military service. Those who have received a National Defense Student Loan may be able to partially clear debt for serving in the U.S. armed forces. National Direct Student Loan and Perkins Loans could be discharged as a result of serving in a hostile area.
Other Circumstances for College Loan Debt Forgiveness
Death. Should the student die after July 23, 1992 any debt will be discharged. This includes PLUS loans that are taken out by the parent. An original, certified copy of the death certificate must be provided by to the U.S. Department of Education.
Total and permanent disability. Provided that a physician is prepared to certify this, it may be possible to eliminate college loan debt. This also applies to war veterans and those who have a service-related injury.
False certification. If a loan was falsely certified by a school, the borrower may be able to discharge any money owed.
Clear Student Loan Debt
The legal cancellation of debt is achievable when a graduate works in a certain profession or is the victim of a set of unfortunate circumstances. However, the majority of graduates will need to find an alternative way to pay off student loan debt. Those who have a short to medium term financial difficulties may be able to defer student loan repayments for up to three years.
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