Help With The Hard Stuff: Managing Student Loans Part 3

Help With the Hard Stuff:

Managing Student Loans

Part 3 (of 5) “Work-out and Default Options between Federal and Private Loans Are Critically Important”
By Gini Nelson, JD, MA

I emphasized in my last column the importance of understanding the different legal options federal lenders and private lenders have in responding to a student loan borrower’s inability to pay. Simply put:

WORK OUT OPTIONS – Private lenders and their servicers are not required to offer forbearances or deferments. Further, flexible repayment has never been a feature offered by private lenders and the Consumer Financial Protection Bureau concluded in a report issued in July 2012 that it is also not now contemplated. In contrast, the federal government must offer deferments or forbearances and has an income-based repayment program, among other plans. Further, with a sufficient commitment to public service, there is also partial federal student loan forgiveness (Public Service Loan Forgiveness (PSLF) Program.)

DEFAULT CONSEQUENCES – Private lenders can file lawsuits against you, and if they win their case, they get a judgment against you. With that judgment they can garnish your wages (with a further procedural court action), take some of your assets, and place liens on your property. The federal government can do all of that PLUS they can more easily garnish your wages (they can do it without a further court action because they are permitted to do it administratively), they can intercept your tax refund, and – very significantly – they can garnish your social security payments. Private lenders cannot garnish your social security payments.

All debt collectors are subject to various fair debt collection laws (these are generally the steps the creditor or the creditor’s agent is taking before filing a lawsuit against you). Loan documents are contracts subject to general contract defenses and other procedural requirements for maintaining a court action (e.g., statute of limitations, the time within which a lawsuit must be filed or be legally considered too old for a court case).

If otherwise appropriate, bankruptcy can help borrowers whether their loans are federal or private. While loans from both federal and private lenders are overwhelmingly not dischargeable in a bankruptcy (there are exceptions), having other debts discharged may give the borrower more “room” in their budget to manage their nondischargeable student loans. Further, whether a loan is from a federal or private lender, some student loans are dischargeable in bankruptcy because of factors relating to the school to which the loan monies were paid. Extreme hardship (as legally defined) is a basis for potentially a full discharge of all student loan debt in bankruptcy.

As for the kinds of schools and school programs loans are used for: The lowest default rates tend to come from borrowers attending four-year schools. Borrowers attending for-profit, private schools tend to have the highest default rates – historically, between 30 percent – 40 percent of them. More about this in the next column.

Here’s the link to #1, Managing Student Loans: As Serious as a Home Mortgage Obligation and Harder to Work Out

Here’s the link to #2, What are the Kinds of Loans Students (and their Co-signers) Can Get?

Editor’s note: Look for “Managing Student Loans” every second and fourth Thursday of the month in the Los Alamos Daily Post.

Gini Nelson, JD, MA has been practicing law since 1983. She’s a member of the State Bar of New Mexico’s Law Practice Management Committee, and the State of New Mexico’s First Judicial District Court’s Access to Justice Committee. Views expressed in the column are hers and not necessarily those of these Committees. This column is providing public information through the auspices of the Los Alamos Daily Post at www.ladailypost.comand is not providing legal advice. Nothing in this column is intended to be an advertisement or solicitation of business. Ms. Nelson’s law office website is at If you have questions that might be of general interest if answered in this column, please send them to ©2013 Gini Nelson Law Office

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