Tag: discharge

Some Ideas About Easing Student Loan Debt Burden

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In the last blog, we discussed whether the government will just forgive student loans. The skeptic in me sees this as a long shot. So, what can be done, short of forgiving all students loans, that can ease the burden on borrowers? We are talking federal loans because that is the bulk of the $1.5 of outstanding student loan debt. Here are some ideas:

  1. Eliminate or significantly reduce origination fees. Right now, undergrads are paying a 1.062% origination fee on their Stafford loans. Not onerous. But, let’s look at Parent and Grad Plus loans. The current origination fee is 4.248%. That is highway robbery! Borrow $100K, owe $104,248 right off the bat. Not right. Reduce the origination fee to 1%.
  2. Decrease the interest rates. Right now, interest rates are 4.53% on Stafford loans. But, the interest rate for Parent and Grad Plus loans is currently 7.08%. There is no reason that the interest on Parent and Grad Plus loans should be any higher than Stafford loans. The interest rate should rate should be fixed at say, 4%. And stay at that rate. Yes, it could be a subsidy to the borrower if interest rates increase, but it is much less a subsidy than forgiving all loans.
  3. Right now, federal loans can be forgiven in an income based repayment plan after 20 years (depending on the program). However, after the loan is forgiven, you have to pay federal income tax on the amount forgiven. Out of the frying pan and into the fire. Any cancellation after years of payments should not be a taxable event.
  4. Amend the bankruptcy code on discharge of student loans. Prior to 1978, student loans were dischargeable in bankruptcy. The Bankruptcy Code of 1978 allowed a discharge for undue hardship or after 5 years of payments. In the 1980’s, the law was amended to allow discharge for undue hardship or after 7 years of payments. In the 1990’s, only proving undue hardship translated into a discharge. Undue hardship is extremely difficult and costly to prove. In NJ, you must show that if you paid your loan, you could not maintain a minimal standard of living, that situation will continue for the life of the loan, and you made a good faith effort to repay the loan. The problem for college grads is that the statistics show that their incomes tend to increase the longer that they are out of school. So, it is difficult, absent some disability, to convince a court that your inability to maintain a minimal standard of living will continue for 10-20 years. Go back to the discharge after 5-7 years of payments.
  5. Give employers tax incentives if they contribute to employees’ student loans. The employer gets a deduction, and the contribution is not taxable income for the employee. A recently introduced bill will allow employers to contribute up to $5250 per year tax free to be used for student loan repayment.

Final thought. We have to look at the source of the problem. That is that college and grad school in the US are way too expensive. Over the last 30 years, those costs have risen at twice the level of inflation. It is beyond my pay grade, but something has to be done to bring these costs down.

College Tuition: Out of Control

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A recent article in NJ Advance Media compared the tuition costs of NJCU ( the old Jersey City State), St. Peter’s University and Stevens Institute of Technology, and projected out tuition costs through 2037. The results are disturbing, to say the least.

The study deals with tuition and fees only, and assumes a 2% increase each year. The study does not include room and board which could add another $10,000 to $20,000 to the equation. For 2019, NJCU has tuition and costs of $12,386. St. Peter’s, $37,677 and Stevens, $52,598. If you add in $15,000 for room and board, we are talking over $52,000 per year to go to St. Peter’s.

But, there are projected increases. In this study, they assume 2% per year (although colleges have raised their tuition over the last 20 years more than twice the inflation rate). So, by 2037, you can expect tuition and fees to be $31,390 for NJCU, $83,740 for St. Peter’s and $107,349 for Stevens.

So, what is going to happen? Well, we see many presidential candidates saying that all student loan debt will be forgiven. But “forgiven” means that the taxpayers foot the bill. Frankly, that is not feasible. College grads earn significantly more than non-college grads over their lifetime. How can you have people earning less money subsidize people who earn more money? Also, people who sacrificed to avoid student loan debt will be subsidizing those who took the money. I may be wrong, but I do not see the American people buying into that scenario.

Something has got to give. I do not have a crystal ball, but I see a combination of initiatives that can reduce the cost of college to the student.

Administrative expenses at colleges have grown exponentially over the last 40 years. Much of that is the result of the government becoming more involved. A balance has to be found which will insure that fundamental student rights are fostered but without having a dean and staff for every group on campus. Belt tightening is in order.

529 programs have to be expanded and modified. Although 529 plans originate in the Internal Revenue Code, in practice it is a federal/state program. Each program is specific to your state. Currently, most investments in education savings plans allow earnings to grow tax free, and allow the taxpayer to withdraw up to $10,000 per year for a qualified educational expense. Given the current tuition rates, qualified withdrawals need to be increased.

Most colleges and universities (private and public) have endowments. Ivy League colleges are using some of their vast endowments to provide grants to their students whose family earns less than $100-125,000 per year. Now, very few colleges have the endowment of a Harvard or Columbia, but colleges can be required to set aside a fixed percentage of the earnings on their endowments for financial aid in the form of grants. To insure that colleges actually follow through on this initiative, failure to comply with set asides could subject the endowments to tax.

Finally, the Bankruptcy Code was modified in the late 1990’s to make student loans non-dischargeable except in cases of undue hardship. Undue hardship is very difficult to prove in court, believe me. However, before the 1978 Code, student loans were dischargeable. Under the 1978 Code, you could discharge the balance on your student loans if you made payments for 5 years. In the 1980’s, the law was amended so you had to make 7 years of payments to get a discharge. Congress should look back to the future and come up with a rational compromise to assist our students in debt so they can move on with their lives.

Student Loans and Bankruptcy- Another Perspective

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Frequently, I have someone call me to inquire about bankruptcy because they cannot afford to pay their student loan debt.  I explain to them that bankruptcy discharges student loans only if the debtor can demonstrate to the court what is called an “undue hardship”.  While under the right circumstances, a debtor can prove “undue hardship”, it is a very high hurdle for most prospective debtors, and expensive  Not only do you have to pay for the bankruptcy, you are required to file an adversary proceeding; that is, a lawsuit within the bankruptcy.  To the extent that the lender opposes the discharge, this means all the elements of litigation- pleadings, discovery, court conferences, motions and trial.  It adds up.

However, that does not mean that bankruptcy cannot be part of a strategy to deal with your student loan debt.  Just as the average homeowner is not going to get out of paying her mortgage, the average student loan debtor is not going to be able to immediately walk away from her student loan debt.  But, you can take steps to make the payments affordable so that you are not sued (if private loan) or subject to an administrative garnishment or social security intercept (if a federal loan).

How can bankruptcy help?  Well, lets say you have $100,000 in student debt and make about $50,000 per year.  You are single with no dependents.  Your rent is high because rents are high in northern  NJ.  Your withholding taxes take 20-25% of your gross income.  Utilities, cable, phone, food, car loan or lease and insurance,an occasional night out (the basics).  Your budget is tight so you used the credit cards they sent you.

So you have $30,000 of credit card debt, about $5,000 of medical expenses that the insurance did not cover. Besides the basics, you are looking at about $500 in monthly payments for credit cards (just above minimums) the hospital (so they don’t sue you).  And then you have to pay your student loans.

A standard repayment in this example is over $1000 per month. But  Income Based Repayment ( IBR) and  REPAYE are less than half that.  Getting close.  If somehow, you could get rid of some of that non-school loan debt, you might be in a position to afford the student loan debt.

A Chapter 7 bankruptcy could discharge the credit card and medical debts.  That would free up over $500 per month.  More importantly, those underlying debt are discharged.  Gone forever.

When you come to Kevin Hanly, Esq. LLC for a student loan analysis, we look at your entire financial picture to arrive at a strategy to make your student loan debt more affordable.  Most times that includes an income based repayment plan. Sometimes, it includes considering and maybe filing bankruptcy.

To get a better idea how bankruptcy works, you can check my bankruptcy website and blog at bankruptcy.kevinhanlylaw.com.

Straight Talk

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It is spring break time.  So, you can expect to see stories about young people going to Florida, the Caribbean or Mexico to party.  Nothing new.  However, this year, there have been a slew of stories about students supposedly using their student loan money to fund the party.  A recent Forbes article by Kate Ashford stated that a recent poll of students indicated that 30.6% of students stated that they are using student loan money to help pay for spring break this year.

Why would students do that?  An Investor Business Daily editorial indicated that just under one-half of millennials believe that their student loans will be forgiven.  After all, Bernie Sanders advocated for forgiving student loans.

So, if the loan is forgiven, who is left with the bill?  The taxpayer.  Sometimes that approach may have some validity on a societal basis if the beneficiary is truly needy.  However, the bottomline is that people with a college degree or higher make significantly more money than people with only a high school degree.  So, in effect, the student loan borrowers looking for blanket amnesty are expecting less fortunate people to pay their debt.  Not going to work, especially considering the outcome of the election.

Lets get real.  Student debt is over a trillion dollars, and up 17% since 2013.  Student loan debt is rising at a rate 3 times inflation, and it is not getting better.  Moreover, on federal loans, the Department of Education has many nasty tools to insure that they are going to collect their money.  The loan is hardly ever dischargeable in bankruptcy, and the DOE can garnish your wages, grab part of your social security check and your full tax refund without even going to court.  Private lenders got all the benefits of non-dischargeability without having to make concessions to borrowers on repayment plans geared to income (Congress really dropped the ball on this one).   Borrowers are not going to get a political bailout, and face a daunting task if they default on either a federal, state or private loans.

Who do you turn to?  Your friendly servicer.  According to the government, the servicers are there to advise the student about the best way to deal with their students loans.  But many just push you into forbearances. In the short run, that may forestall payments.  However, the accrued interest is just added to your principal debt.  So, you leave forbearance owing more than you entered.  In January, the CFPB filed a 66 page complaint against Navient alleging, among other things, that Navient pushed federal loan borrowers with long term employment issues into forbearances instead of income driven plans.

Your student debt is not going to go away miraculously.  You are going to have to deal with it.  We are here to help.