Consider this before you take student loans

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vanwinkle
Posts: 9740
Joined: Sun Dec 21, 2008 3:02 am

Consider this before you take student loans

Postby vanwinkle » Thu Jan 02, 2014 12:51 pm

When you're applying to law school, federal student loans sound great. No matter how much you need, the requirements to get one are pretty minimal (be a US citizen, pay the minimum each month on your credit cards, don't get caught smoking pot). They'll pay for your tuition and your living expenses, and hey, once you're making that $160K you'll easily pay it back, right?

Today's New York Times article highlights the one thing that most people don't even think about when they take out loans: Student loans are not dischargeable in bankruptcy except in extraordinary circumstances.

The New York Times wrote:Before she became ill, Ms. Jorgensen took out $43,000 in student loans. As her payments piled up along with medical bills, she took the unusual step of filing for bankruptcy, requiring legal proof of “undue hardship.”

The agency charged with monitoring such bankruptcy declarations, a nonprofit with an exclusive government agreement, argued that Ms. Jorgensen did not qualify and should pay in full, dismissing her concerns about the cancer’s return.

The article is mostly about how this agency, the Educational Credit Management Corporation, has been overly aggressive in collecting student loan debts, even when those debts are discharged. That's wrong, and I'm glad the NY Times is drawing attention to it, but the damage is already done. ECMC has managed to influence bankruptcy law over the last few decades, convincing bankruptcy courts to define “undue hardship” so strictly that few people will ever be able to meet it. Debt-management strategies like Income-Based Repayment have made it easier to reduce payments, but ECMC managed to twist even this against debtors:

The New York Times wrote:One of the places where Educational Credit has had the biggest impact has been to shape the meaning of the phrase “undue hardship,” the standard required since the 1970s for relief from student debt. In 2009, for example, the agency persuaded the United States Court of Appeals for the Eighth Circuit to adopt stricter standards. One argument it made was that if student borrowers seeking bankruptcy could qualify for a repayment plan tied to their incomes they were, by definition, ineligible for relief.

Read that last sentence again. You can never have an “undue hardship”, because IBR will lower your payments. In the meantime, your $200K in student loans keeps accruing new interest at almost 8%. If you ever do come into money again, even when you retire, they'll take it:

The New York Times wrote:Lawmakers began arming the Department of Education with a set of unprecedented collection tools, including the ability to garnish debtors’ wages and Social Security, and appropriate their tax rebates.

Under IBR, your remaining debt disappears after 25 years... but that loan forgiveness will count as taxable income. By the time loan forgiveness happens, that $200K in debt could have grown to more than half a million dollars. Income tax on $500K is less than $500K, sure, but you'll still owe the IRS a huge chunk of change.

All of this doesn't mean it never makes sense to take out student loans. It just means you better be damn sure you know what you're getting yourself into. Good luck, and may the odds be ever in your favor.

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Fiero85
Posts: 1907
Joined: Sun Jun 30, 2013 3:38 am

Re: Consider this before you take student loans

Postby Fiero85 » Thu Jan 02, 2014 1:01 pm

vanwinkle wrote:When you're applying to law school, federal student loans sound great. No matter how much you need, the requirements to get one are pretty minimal (be a US citizen, pay the minimum each month on your credit cards, don't get caught smoking pot). They'll pay for your tuition and your living expenses, and hey, once you're making that $160K you'll easily pay it back, right?

Today's New York Times article highlights the one thing that most people don't even think about when they take out loans: Student loans are not dischargeable in bankruptcy except in extraordinary circumstances.

The New York Times wrote:Before she became ill, Ms. Jorgensen took out $43,000 in student loans. As her payments piled up along with medical bills, she took the unusual step of filing for bankruptcy, requiring legal proof of “undue hardship.”

The agency charged with monitoring such bankruptcy declarations, a nonprofit with an exclusive government agreement, argued that Ms. Jorgensen did not qualify and should pay in full, dismissing her concerns about the cancer’s return.

The article is mostly about how this agency, the Educational Credit Management Corporation, has been overly aggressive in collecting student loan debts, even when those debts are discharged. That's wrong, and I'm glad the NY Times is drawing attention to it, but the damage is already done. ECMC has managed to influence bankruptcy law over the last few decades, convincing bankruptcy courts to define “undue hardship” so strictly that few people will ever be able to meet it. Debt-management strategies like Income-Based Repayment have made it easier to reduce payments, but ECMC managed to twist even this against debtors:

The New York Times wrote:One of the places where Educational Credit has had the biggest impact has been to shape the meaning of the phrase “undue hardship,” the standard required since the 1970s for relief from student debt. In 2009, for example, the agency persuaded the United States Court of Appeals for the Eighth Circuit to adopt stricter standards. One argument it made was that if student borrowers seeking bankruptcy could qualify for a repayment plan tied to their incomes they were, by definition, ineligible for relief.

Read that last sentence again. You can never have an “undue hardship”, because IBR will lower your payments. In the meantime, your $200K in student loans keeps accruing new interest at almost 8%. If you ever do come into money again, even when you retire, they'll take it:

The New York Times wrote:Lawmakers began arming the Department of Education with a set of unprecedented collection tools, including the ability to garnish debtors’ wages and Social Security, and appropriate their tax rebates.

Under IBR, your remaining debt disappears after 25 years... but that loan forgiveness will count as taxable income. By the time loan forgiveness happens, that $200K in debt could have grown to more than half a million dollars. Income tax on $500K is less than $500K, sure, but you'll still owe the IRS a huge chunk of change.

All of this doesn't mean it never makes sense to take out student loans. It just means you better be damn sure you know what you're getting yourself into. Good luck, and may the odds be ever in your favor.


I would like to use my 100th post to acknowledge that this info is 100% need-to-know stuff. Careful, careful, careful with the loans people! 8% interest NON DISCHARGEABLE debt ain't no joke.

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guano
Posts: 2268
Joined: Mon Feb 18, 2013 9:49 am

Re: Consider this before you take student loans

Postby guano » Thu Jan 02, 2014 1:03 pm

Does anyone know how foreign bankruptcy proceedings may impact US debt obligations?

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Birdnals
Posts: 4576
Joined: Wed Apr 04, 2012 10:26 am

Re: Consider this before you take student loans

Postby Birdnals » Thu Jan 02, 2014 1:07 pm

Very good post WV. People need to know this is no joke and can ruin your life as much as a felony conviction.

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albusdumbledore
Posts: 1132
Joined: Thu Nov 05, 2009 4:38 pm

Re: Consider this before you take student loans

Postby albusdumbledore » Thu Jan 02, 2014 1:16 pm

Additionally, if you have good credit, shop around for private loans too. When I was doing this, I got a substantially better loan offer than federal loans could provide.

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guano
Posts: 2268
Joined: Mon Feb 18, 2013 9:49 am

Re: Consider this before you take student loans

Postby guano » Thu Jan 02, 2014 1:57 pm

albusdumbledore wrote:Additionally, if you have good credit, shop around for private loans too. When I was doing this, I got a substantially better loan offer than federal loans could provide.

actually, this is incredibly credited:
Lose IBR, gain ability to discharge in bankruptcy

If you end up needing IBR, there's a not negligible chance you might consider bankruptcy




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