Student Loan Caveats

During the last generation, college costs increased 6.8% annually, while medical costs increased by a much more criticized 4.9% per year. Additionally, state governments require families to pay a higher proportion of the total cost at state universities than they did for the previous generation. A generation ago, a student could work part time (full time in the summer) and pay for his/her own college expenses. This is almost impossible today.

Many students used to get grants for much of their college costs. Now, scholarships are less generous, and students must borrow more. College graduates in Kentucky start out with an average student loan debt of more than $23,000. Lower income students, students who take more than 4 years to graduate and those who go to graduate school will likely be deeper in debt.

I have maintained that, despite its expense, the advantages of having a college degree make college worth it even for students who must borrow heavily.

Consider:A bachelor’s degree is the best “anti-poverty insurance” you can buy. Fewer than 4% of college graduates are poor. Kentucky’s poverty rate is 19%.

The unemployment rate for people with a college degree is much lower than it is for people lacking a college degree.

Of people with an annual income above $150,000, 82% have a bachelor’s degree; just 6.5% have no more than a high school diploma.

On average, people with a college degree earn twice as much money over their careers as people who do not

However, there is a darker side to this story. Some people, particularly those who borrow to attend college but do not finish, ruin their lives because their college experience did not increase their earning capacity, and they are saddled with debts they cannot afford. Seventy-percent of those who default on their student loan payments withdrew before completing their education program. Of course, low income students are more likely to borrow more money for college, and for a variety of reasons, are less likely to complete their course of study.

Some students, especially those from low income families are victimized by unscrupulous proprietary schools (aka for-profit-schools), which have very low graduation and very high student loan default rates. (44% of defaults while only enrolling 12% of students nationally). Students should consider the graduation rates and loan default rates of the institutions of higher learning they are considering attending.

Once a borrower defaults on a Federal Assisted student loan (hereinafter, “Federal Loan”), such as a Stafford Loan, the United States government has extraordinary powers to collect the debt. There is no statute of limitations; the government may pursue collection forever. It can garnish the borrower’s wages without a court order; it can seize the borrower’s tax refund, even the portion of it attributable to the low income credit, or a portion of the borrower’s Social Security check. Furthermore, the borrower will be ineligible for additional student loans, which will make it impossible in most instances for him or her to return to school.

Private school loan lenders have only traditional remedies upon default, such as litigation, and they are subject to statutes of limitations; however, unlike Federal Loans, they do not have to permit the borrower to defer payment while he/she is in school, and they do not provide the favorable repayment options which are available with Federal Loans. They also often carry a higher rate of interest. For these reasons, I believe that students are better off borrowing under a Federal Loan program.

Student loans are difficult to discharge in bankruptcy. The debtor needs to file an adversary proceeding in bankruptcy court and prove that repaying the student loan will impose an undue hardship on the debtor and the debtors’ dependents. In determining “undue hardship”, the Courts consider whether the debtor can maintain a minimal living standard if forced to repay the loan(s); whether the situation is likely to persist for a significant period of time; and whether the debtor has made a good faith effort to repay the loan(s).

People who are having difficulty paying back their Federal Loan who are not in default should consider entering into an income determined repayment plan. There are five different payback plans which are income driven. While the eligibility requirements for each program are complex, essentially each requires borrowers to pay either 10% or 15% of their discretionary income (income above 150% of the poverty level) for a 20 or 25 year period. A single person with a $40,000 income will either pay $186 or $279 per month depending upon the program. Debt which remains at the end of the repayment period is forgiven.

People who work full time for a governmental or a non-profit 501 (c) (3) corporation may have their Federal Loans forgiven if they make monthly payments for 10 years (120 payments which do not have to be consecutive.) They may, in many instances, also use one of the income driven payback plans and count the payments made toward the 120.

There are a variety of other methods that some debtors may employ to ease the burden of their student loans. Legal Aid organizations throughout the country will be able to help some of these. However, the best way for students to avoid the problem is to be careful not to borrow more than they need and to understand their repayment schedule and the payment options that are available for them.

For more information, see Student Loan Law, by Deanne Loon in and Persist S. Yu, The Consumer Credit and Sales Legal Practice Series National Consumer Law Center (2015); and I relied heavily on these two sources in preparing this article.

Richard A. CullisonExecutive Director EmeritusLegal Aid of the Bluegrass104 E. Seventh Street, Covington, KY 41011cullison65@gmail.comPhone: 859-240-1224

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