The student loan system has seen significant changes throughout 2020. The Student Loan Planner® team of consultants has been following updates to keep you informed about the payment suspension, interest freeze, and the future of student loans in this election year.
Because of the changes and the uncertainty it can bring, many of you have been asking questions.
To answer your questions, student loan experts Meagan McGuire, Lauryn Williams, Justin Harvey, and Rob Bertman have come together to give you the low-down on student loans and what the changes could mean for you.
“There have been a lot of changes to the student loan system lately, and we’re getting tons of questions,” said Williams. “I’m really hoping we can answer a lot of different questions for the audience.”
1. What happens if your income goes up and you no longer qualify for partial financial hardship? 2. What are the pros and cons of employer student loan benefits? 3. How are student loans affected in the bankruptcy process? 4. Is it smart to consolidate FFEL loans to qualify for forbearance under the CARES Act? 5. The bottom line on your student loans
What happens if your income goes up and you no longer qualify for partial financial hardship?
Many borrowers report income increases during the recertification process. If you’re on PAYE or IBR, you may have received a letter saying you must change your repayment plan because you no longer qualify for partial financial hardship.
“Partial financial hardship is the mechanism by which income-driven repayment plans are made to be affordable to the payer,” said Harvey.
If you owe $200,000 or $300,000 but have a $50,000 income, partial financial hardship is how the Department of Education lowers your monthly payments to be based on the income you earn rather than the debt amount.
As your income increases, your payment calculation might increase to equal the same amount you’d pay if you were on a 10-year standard repayment plan. If that happens, you’ll get a letter that says you no longer qualify for your income-driven plan.
“If you give [your servicer] a call, they are going to confirm that you no longer have a financial hardship,” said McGuire. “What they won’t make super clear is that they cannot kick you off of that plan.”
That means your payments are capped at that amount, and you’ll continue to qualify for public service loan forgiveness or longer-term forgiveness. An important consideration is this only applies to PAYE, IBR, and ICR. It does not work with REPAYE because there is no payment cap.
What are the pros and cons of employer student loan benefits?
Companies can offer student loan benefits to attract employees, but the benefits can be detrimental to student loan borrowers.
“There are a lot of times where the employer gives the employee a chunk of change to pay off their student loans, and the person with the loans takes the money and throws it all at their loans,” said Bertman.
This type of employer student loan benefit can backfire by putting your loans in paid-ahead status. “If you’re going for loan forgiveness, it throws off your ability to get that,” said Bertman.
But not all benefit packages are the same. Harvey has seen some employers add an extra $500 to a paycheck that’s loosely earmarked for your student loans. “It’s essentially increased pay for you,” said Harvey.
That is very different from a benefits offer where your employer agrees to pay $500 a month or $20,000 per year toward your loans but writes the check directly to the servicer.
The first option is almost always desirable. “Cash in your checking account is tough to beat,” said Harvey. But the second option where the employer directly pays your servicer is only helpful if you’re going for full repayment.
“If you’re on any type of forgiveness strategy, it’s almost certain to be suboptimal because you’re just paying off loans that would have been forgiven anyway.”
If you’re not sure how an employer student loan benefit might impact your repayment, reach out to one of our student loan experts to see if booking a consult is right for you.
How are student loans affected in the bankruptcy process?
It’s a hard time for a lot of families during the coronavirus outbreak. Many are struggling to pay bills or are considering filing for bankruptcy.
“There’s a lot of information about bankruptcy and student loans that says you can’t bankrupt student loans,” said Bertman. “But there might be some cases where student loans can be forgiven in bankruptcy.”
“We’re not advising that anyone go into bankruptcy because that’s kind of like a last resort,” said Bertman. But we can talk about how student loans are affected in the bankruptcy process.
The bankruptcy code treats student loans differently than other types of debt, so it’s very rare to have student loans discharged in bankruptcy. But it can happen – and it did in a case that set a precedent in the U.S. Court of Appeals for the 10th Circuit.
“You have to prove that there’s this hardship above and beyond what is happening in the bankruptcy in order to get these loans discharged,” said Williams.
It’s primarily been seen with private student loans because they don’t have income-driven repayment plans available.
“Private lenders will only offer you a payment based off of the balance, the interest rate, and the term,” said McGuire. “To go through bankruptcy and to successfully win your case, you have to prove that you have undue hardship, which means you are unable to financially provide for your family – your basic needs – and make those required monthly payments.”
Federal loans offer payments based on your income, making it nearly impossible to meet the undue hardship threshold unless you have private loans.
Is it smart to consolidate FFEL loans to qualify for forbearance under the CARES Act?
There’s some confusion about FFEL loans. If you have an FFEL loan, it could have been issued commercially or federally. FFEL loans that were taken out before 2010 are more likely to be commercial loans.
Federally held student loans qualify for zero interest and zero payments under the CARES Act. “Commercially held FFEL loans – even though they’re federal – they’re not held federally,” said McGuire.
That means they don’t qualify under the CARES Act.
If consolidation makes sense for you, it could allow you access to student loan relief benefits to provide you financial relief.
“We know it’s hard times for a lot of you out there, and even when times are good, student loans can also feel like you’re under a hard time,” said Bertman.
But your life doesn’t have to be defined by your student loans.
“What we end up finding,” said Harvey, “whether its PSLF or taxable forgiveness or some other sort of plan often involving an income-driven repayment strategy, we can cut a path for you into the future that is very do-able… we frequently find it’s not nearly as bad as you think.”
Here at Student Loan Planner®, our team of experts is here to help you. “We want to make sure you’re in the best possible position given your student loan debt,” said Bertman.
You can book a consult for in-depth, custom, one-on-one student loan help. But even if a consult isn’t right for you, we’re dedicated to plenty of free content, including free calculators and specific blog posts related to your profession.
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