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The nightmare of student loans


One of the tragic fallouts of the economic malaise of the past few years has been the rise of the student loan crisis. Even before the recession, millions of hard working Americans were struggling to make student loan payments on the income they were earning. After the recession began, the situation got even worse as millions of Americans lost their jobs, had their pay or hours reduced or had to take a lower paying job after losing a great career. The crisis was compounded as millions of college graduates with thousands to hundreds of thousands of dollars in student loans tried to enter the workforce only to discover there were no jobs waiting for them. As of this writing, it is estimated that Americans owe over $1 trillion in student loan debt, and approximately 25% of student loan debt is in default. A recent study estimated that student loan debt creates a 4 trillion dollar drag on the economy, because an entire generation of Americans can’t buy homes or save for retirement due to their student loan burden. The problem is becoming generational because parents paying back student loans may not be able to save for their childrens’ education, forcing the kids into a cycle of high student loans as well.

If you are unable to pay your student loans, their may be options to help. The federal government has created 2 programs that base your student loan payment on your income. The programs are called the Income Contingent Repayment Program (ICR) and Income Based Repayment Program (IBR). Both of these programs recalculate your student loan payments on a payout of up to 30 years and base the payment on a formula using your income. For many borrowers with large student loans the IBR is often a better solution because the formula often results in a smaller payment than ICR. Under both programs, if you make your student loan payments for 25 years and have not paid them off, the balances are forgiven.

There are also limited circumstances where student loan debt can be forgiven after 10 years in repayment. Generally you have to work in certain types of public interest jobs and keep you loan current during the 10 year repayment period. In addition, the U.S. Army offers a student loan repayment program that offers repayment of up to $65,000.00 in student loan debt in exchange for 3 years of active duty service.

Depending on your circumstances, you may be eligible for deferments or forbearances which will give you temporary suspension of your monthly payments.

If you have exhausted your other options, you may be able to get relief from student loan wage garnishments, lawsuits and federal offsets by filing a chapter 13 bankruptcy reorganization plan. Under chapter 13, an automatic stay protects you from most collection activity while you repay part or all of your debts through a court approved repayment plan. While the student loans are not discharged, chapter 13 can give a student loan borrower a 3 to 5 year “break” from student loan collections, giving them breathing room to hopefully increase their income so that they can begin repaying the student loans when they emerge from bankruptcy.

Unfortunately discharging student loans is very rare in Texas, because the courts have interpreted the bankruptcy provisions related to student loans very harshly, so very few people can get even part of their student loans discharged. For some student loan borrowers, a chapter 7 bankruptcy can discharge other types of debts, such as credit cards, medical bills, pay day loans and personal loans, freeing up income to pay back student loans. The experienced and board certified bankruptcy attorneys at Bailey & Galyen can assist you with determining whether a chapter 7 or 13 bankruptcy may benefit your particular situation and provide some relief from your student loans.