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While you can’t get student loan debts discharged through a chapter 7 bankruptcy, the federal government does offer the equivalent of a chapter 13 bankruptcy. If you're not familiar with this type of bankruptcy its purpose is one of reorganization – to give you time to reorganize your finances and pay off your debtors. The federal government's equivalent of this are its increasingly liberal loan-modification plans. For example, one of these programs is called Pay As You Earn. You may have read about this program earlier this year when Pres. Obama signed an executive order making as many as 1.4 million more borrowers eligible. This plan permits borrowers who are financially distressed to cap monthly payments at just 10% of their discretionary income and gives them as many as 20 years to repay their loans. Unfortunately, many people who would be eligible for this program are unaware that it's available to them. In addition, some are not eligible because of technicalities in the program such as past-due payments or loans that started into repayment mode too many years ago. In addition, the companies that service student loans have been less than forthright about discussing these options with their customers. And if you have private loans they are precluded from this program.
Determining your eligibility
If you’re carrying a load of federal student debt, don't be turned off by the phrase “financially distressed." What this really amounts to is that your payments will be based on 150% of the federal poverty guideline and your family size. In addition, you must have gotten your first federal student loan after October 1, 2007 and you need to have gotten a Direct Loan or Direct Consolidation Loan after October 1, 2011. Note: If you're wondering whether or not you would qualify for this program, the government has a Pay-As-You-Earn calculator you could use to determine your eligibility.
If you are not eligible
If you determine you are not eligible for Pay As You Earn, there are two other income-driven programs available that could make it easier for you to repay your student loans. One of these, Income-based Repayment, would cap your monthly payments at 15% of your discretionary income and Income-contingent Repayment caps it at 20%. There is more information on these income-driven repayment programs available on the Federal Student Aid website.
It doesn't have to be a personal crisis
While student debt may or may not be a crisis, it doesn't have to be a crisis for you. As you have read, there are increasingly liberal loan modification programs available that could make it much easier for you to manage and pay off those burdensome student loans.