According to the Institute for College Access and Success, an estimated 69 percent of all students graduating from four-year colleges have student loan debt.
On average, students from four-year colleges carry $28,400 of debt into the ‘real world’.
Students who graduated from college in the class of 2014 earned median starting salaries of $45,478, according to the National Association of Colleges and Employers. Given the cost of living, especially in metropolitan areas, it’s no wonder that 20 percent aren't paying their loans at all.
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Private student loans don’t offer the flexible repayment options of their Federal counterparts. There's no loan forgiveness program. Even forbearances are hard to come by. And with more than 90 percent of new private student loans cosigned, the burden of repayment falls on more than just borrowers.
To make payments more affordable, borrowers have started turning to the federal bankruptcy laws.
Bankruptcy can help lower your debt load, making it easier to pay student loans. The law can stop collection efforts against borrowers and cosigners. Though bankruptcy won't usually wipe out student loans, it can help restructure your payments.
Here's how bankruptcy can put you back in control over your student loans.
Wipe Out Other Debts
If too much of your income goes to paying other debts, that makes it difficult to pay the student loans. Filing for bankruptcy can wipe out those bills and free up more money for student loan payments.
A Chapter 7 bankruptcy case can wipe out your liability to repay certain debts. The process is straightforward, with most cases completed within about 6 months. During that time, lenders aren't allowed to collect on your student loans.
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If you qualify, this could be a fast way to make your educational debts more manageable.
Restructure Your Student Loan Payments
Many people use Chapter 13 bankruptcy, a court-ordered debt consolidation plan for people with regular monthly income, to reduce their student loan payments.
The law reviews your average income over the past 6 months and deducts your basic living expenses. You agree to pay whatever's left over to a court-appointed trustee for three to five years.
Once the judge approves your plan, the trustee divides the money among your creditors. Creditors aren’t allowed to collect from you, and your guarantors are similarly protected.
Put Lenders to the Test
In order to get paid through your Chapter 13 repayment plan, a creditor must file a Proof of Claim. The claim needs to provide detailed information about the debt. That includes not only the balance due, but also the owner of the debt.
If the claim is incomplete or incorrect, you can ask the court to reduce the amount due or deny the claim entirely.
People in default on private student loans often have difficulty getting this information. The claims process forces the lender to prove every aspect of loan, which helps you understand your obligations more fully.
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Beware The Downsides
Filing for bankruptcy can help people struggling with private student loans. But the solution isn't a perfect one. Some of the downsides are as follows:
- Your balance may rise if the loan interest is higher than your plan payments. For this reason, some people try to pay their private student loans in full through bankruptcy. Others plan in advance to file a second case once the first is completed.
- Many private student loans will go into default as soon as you file for bankruptcy. This means the loan will go into collections once your case is over rather than reverting to monthly payments. You may, however, be able to avoid this through careful planning with an experienced bankruptcy attorney.
- Though your bankruptcy won’t negatively impact any guarantors, the fact that the loan is in default after your case is over will lower their credit score.
- The fact that you filed for bankruptcy will remain on your credit report for up to 10 years in the case of a Chapter 7 filing, and 7 years for a Chapter 13 filing. That doesn’t mean your credit score will suffer, though. In fact, the Federal Reserve Bank of New York came out with a study on the credit impact of bankruptcy, noting that those who filed bankruptcy had access to more new lines of credit than those who were past due on their debts and took no action.
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A Choice to be Considered
Filing for bankruptcy may be a good option to help you buy time on your student loan payments. But before you make that choice, you need to understand what it means for you and your family in the long run.
Regardless, it’s a choice that you shouldn’t overlook in your search for solutions to your private student loan problems.
Remember that your best choice is an individual one that takes into account your situation as well as your goals.