We find that our clients with student loans are often confused about their options for putting that debt behind them. This month The Atlantic ran a column on settling student loans and discharging them in bankruptcy including these paragraphs:
In fact, the default rate on student loans during the first two years out of school is almost 7%. Once they’ve consumed the education, a large number of students seem to decide that it wasn’t worth it, and that therefore someone other than them should have to eat the cost.
Because it’s such a common idea, Congress has made it very difficult to shed student loan debt. No student loans, not even the private ones, can be discharged in bankruptcy.
The long arm of the debt collectors
A government website outlines the powerful collections tools available to student loan lenders, both public and private:
Once your loan is assigned to a guaranty agency or the U.S. Department of Education (Department) for collection, the following steps may be taken to recover the outstanding balance due:
- The Department of the Treasury may offset your federal and/or state tax refunds and any other payments, as authorized by law, to repay your defaulted loan.
- You may have to pay additional collection costs after your loan is assigned to a private collection agency for collection.
- Also, you may be subject to Administrative Wage Garnishment, whereby the Department will require your employer to forward 15% of your disposable pay toward repayment of your loan.
- Federal employees face the possibility of having 15% of their disposable pay offset by the Department toward repayment of their loan throughFederal Salary Offset.
- The Department may take legal action to force you to repay the loan.
- Finally, credit bureaus may be notified, and your credit rating will suffer.
Bottom line: bankruptcy may be a good option for most of your debt. Student loans will not discharge in bankruptcy, but restructuring or discharging the rest of your debts through bankruptcy will make it easier to pay the student loans off.