Time for a Break

We find ourselves at the end of 2012, and once again it has been an interesting year. This marks the end of the first full calendar year for the Financial Aid Corner. Thanks to all the readers for your continued interest! Financial Aid isn't always the easiest information to explain, but I hope that you have learned as well as been encouraged to give thought to things that you may not have considered before.

The campuses are taking a break from classes for two weeks and our Arnold campus is gearing up for their January start. As we take this time to visit with family, to enjoy traditions, and to take some time off, our hope is that you have a fun, safe holiday season.

The Financial Aid Corner will return with new information, rules, news, and many other elements of the FA world next month. See you then!

New Student Loan Repayment Rules for 2013

There is news in the world of federal student loans. There are changes to the income-based repayment (IBR) plan and the income-contingent repayment (ICR) plan. Some of the information is broad for right now, but it looks that for the IBR, there will be new rules in documenting income. For the ICR, new rules will ease the documentation requirements as well as better clarifying parts of the plan. These are to begin July 1, 2013.

Another big change in repayment is a new IBR option: the Pay As You Earn repayment plan. This plan will limit the student's payments to 10% of the difference between their adjusted gross income and 1.5 times the poverty level for the area the student resides. This plan will also reduce from 25 years to 20 years the amount of time a student must make payments under the plan before the remaining loan balances are forgiven.

This Pay As You Earn repayment plan has some conditions. First, the borrower's loans must be held under the Federal Direct Loan Program; second, the borrower must be a new borrower as defined on or after October 1, 2007; third, the borrower must also have received loan disbursements on a direct loan on or after October 1, 2011; and fourthly, the borrower cannot repay under this plan any parents PLUS loans or any consolidation loans that include a parents PLUS loan.

As I understand it, if a borrower's payments while in this Pay As You Earn plan in the first three years do not satisfy the accruing interest and as long as the borrower is repaying a subsidized loan, then the Department of Education will not charge interest above the amount of the borrower's payment on that loan. Naturally, the borrower will have to submit income information for this plan, and like the regular IBR plan, the borrower will have to resubmit most recent income information.

There is no concrete date set yet for the Pay As You Earn repayment plan because as soon as the guidance is published, then the Department of Education will implement it.

Can a Student Discharge a Loan through Bankruptcy?

Can a student discharge a loan through bankruptcy?

The answer is (like everything in financial aid) somewhat complicated. In 9 out of 10 cases, the answer is no. But there is still that 1 case when it's possible. How? There are many ways, and it really depends on the state, the individual court, and the individual judge. However, what's stated here is the most often scenario.

Firstly, you have to look at the wording. In 2005, the exception to discharge was extended to include all education loans (private and federal). A debtor in Chapter 7 or Chapter 13 cannot discharge 1.) an educational loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or 2.) an obligation to repay funds received as an educational benefit (grants, scholarships); or 3.) any other educational loan that is a "qualified education loan" UNLESS excepting such debt from discharge under the above would impose an "undue hardship" on the debtor and the debtor's dependents.

That's the key: they have to prove "undue hardship", and that's rather difficult. So, what's the process?

1. The debtor files a bankruptcy petition (either Chapter 7 or 13).

2. The creditor then has to establish the existence of the debt and that it falls into one of the nondischargeable categories.

3. The debtor files an adversary proceeding and how to show an "undue hardship".

How does one prove "undue hardship"? The most often used test is called the Brunner Test. The Brunner Test is a 3-part test where the debtor has to prove all three of the following:

1.) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to pay.

2.) That additional circumstances exist indicating that the current state is likely to persist for a significant portion of the repayment period of the student's loans.

3.) That the debtor has made good faith efforts to repay the loan.

The first part of that test is highly subjective and will change from court to court. In some cases the debtor will say "cigarettes are too expensive" and the court will tell him to quit smoking. On the other hand, some allowed expenses could be internet and phone. In some cases, cable is out of the question, but in other cases cable is fine because it isn't satellite. The second part of the test has to show that whatever the issues are, they are out of the debtor's control. Things such as a person having diabetes and resulting blindness was enough, as was asperger's syndrome with osteoperosis. Switching to a lower paying job by choice won't work because they will say you aren't maximizing your potential. The third part of the test has to show the debtor tried to repay the loan but couldn't because of the issues in the other parts. Trying alternative payment plans looks good, as does attempts at legitimate income maximizing and minimizing expenses.

Apparently 5 of 10 cases the debtor is denied discharge. 3-4 of 10 are close but don't quite have what it takes. And then there's maybe 1 legitimate case. It is very difficult to prove all three prongs of the Brunner Test, which is why they usually don't succeed. There have been attempts to change this setup, but it's unlikely it will change for awhile.

In the end, it's much easier and better for the student credit-wise to just work with their student loan servicer.

A Great Budget Calculator

One of the things that has been mentioned several times on this blog, and will continue to be mentioned is the need for students to use budgets to assist them in their daily lives. What better way to know how much one can spend and live within their means than a budget? But how do they look? And aren't they hard?

No they aren't. Here is a link to an interactive budget calculator tool. It is available from the Mapping Your Future website which is very good for helping students form an objective manner on everything from repayment to financial literacy. In this case, they are assisting with living within your means.

If you don't already have a budget or understand how it works, use this tool and do some reading into how it works. Faculty at your campus will also be willing to assist you with understanding budgets. In the meantime, use this tool to figure out your budget.

Remember: the main reason why a budget is especially necessary for a student is so that you know how you can afford your student loan payments.