Repaying Student Loans: Options for Dealing with Debt

Dealing with massive student loan debt – often into the six-figure range – has become a fact of life for many young adults.

Bankruptcy is usually not a solution, as student loan debt is generally not dischargeable in bankruptcy, absent a showing of undue hardship. “Undue hardship” means that the borrower cannot maintain a minimal standard of living if required to repay, that this  situation is likely to continue for reasons beyond the borrower’s control for the balance of the repayment period, and that the borrower has made a good-faith effort to repay the student loans. This is a difficult standard to demonstrate, usually requiring the presence of a debilitating medical condition.

Fortunately, there are other options to deal with student loans, particularly those guaranteed by either the U.S. Department of Education or other governmental or non-profit entities.

Loans under the Department of Education’s Direct Loan program or those issued under the Federal Family Education Loan Program (FFELP) are eligible for repayment options to help “soften the blow.” The borrower is not required to file for bankruptcy protection to take advantage of these programs.

• The Income Contingent Repayment Program (ICRP) permits borrowers under the Direct Loan Program, as well as borrowers under the FFELP who consolidate those loans through the Department of Education’s W. D. Ford Loan Consolidation program, to repay their loans at an annual amount (payable in monthly installments) equal to 20 percent of the amount by which their adjusted gross income (AGI) exceeds the federal poverty rate. The repayment period extends up to 25 years and adjusts annually, based on the AGI shown on the borrower’s federal tax return. Any unpaid balance at the end of 25 years is then forgiven.
• The Income Based Repayment program (IBR) permits borrowers under the above loan programs (other than Parent PLUS loans) to repay these loans at an annual amount (payable monthly) equal to 15 percent of the amount by which their AGI exceeds 150 percent of the federal poverty rate. The borrower initially must demonstrate that the annual amount due on his or her loans exceeds 15 percent of the difference between the borrower’s AGI and 150 percent of the federal poverty level, based on a 10-year repayment plan. Once so demonstrated, eligibility for this program will not be lost. Like the ICRP, the IBR program lasts 25 years. At the end, any unpaid amount is forgiven, and the payments adjust annually, based on the borrower’s federal tax return. Unlike the ICRP, the income of a spouse may be excluded from the AGI figure used to calculate the repayment amount if the couple file their taxes separately.
• Public Service Loan Forgiveness program (PSLF) is available to those employed in certain public service jobs, or in certain capacities with non-profit IRS 501(c)(3) organizations. Under PSLF, a borrower who makes 120 consecutive monthly payments under an ICRP or IBR program, and while continuously employed in a qualified job, is eligible to have the unpaid balance of the loans forgiven. Unlike the other loan forgiveness programs, the amount of the forgiven balance will not be treated as taxable income to the borrower. Presently, loan balances forgiven under the ICRP and IBR not within the PSLF program are treated as taxable income.

In October 2011, President Obama proposed to accelerate a program under which borrowers could repay an amount equal to 10 percent of their income over 20 years to pay down student loan debt. Unfortunately, that program has yet to be implemented. 

Regulations to implement that program, as well as some changes to other aspects of the student loan program, are still under discussion.  It is likely, however, that this option, when finally available, will be limited to loans on which the Department of Education is the guarantor, taken out after July 2012.

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Frederick S. Coombs III is a Youngstown creditors’ rights and bankruptcy attorney with Harrington, Hoppe & Mitchell. Coombs is certified as a specialist in creditors’ rights law by the American Board of Certification.