Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Wednesday, December 23, 2015


Merry Christmas and Happy New Year!

The President and the United States Department of Education has just unwrapped a gift for every college student who ever took out loans to get an education - But beware! Sometimes the gift wrapping is much more attractive than the present. This one should be opened with extreme care, or as I will suggest, left under the tree!

Effective December 17th, 2015 President Obama's "Revised Pay as You Earn" aka REPAYE is now an "option" available in the gift sack of what I can only describe as the White Elephant Gift of the Year!

REPAYE is the latest repayment scheme and like the other loan payment programs attempts to "help" struggling debtors.  My idea of help must be different from the President and the Department of Education, because I see more problems with this plan than any viable aid to the debtors.

Once again the Department of Education (DOE) decorates and wraps up the plan in a display of glittering ribbons and bows - and you guessed it "there are plenty of strings attached" and the surprise revealed inside could be non-returnable.

The gloss and glitter appeal is laid out in the attraction that the plan is a "fit-all" plan.  No matter how old the debt is, regardless of the debtor's income, and with the lure of only having to pay 10% of discretionary income for only 20 years, everyone is eligible for this fantastic gift!

But wait!  Hold your horses (or reindeer)!  Yes... you can be sure - there is some "coal" in the stockings here.  Not everything that glitters is Gold(en). Doing a "sneak-peak" when no one is looking often reveals what is under the fancy wrappings.

In the case, we find a few unfavorable things in the box.  First, to be eligible for this new plan the borrower cannot be in default on the loan(s).  Second REPAYE is not available for student who have taken out private loans.  Direct Loans yes, private funded no.

Yes you can have a federal loan for a for-profit school or trade school, then roll it into a  Direct Loan -  it will then be eligible for REPAYE. So REPAYE is open to students with for-profit schools and trade or technical schools if their loans are consolidated, a process that is part of enrollment in most all of the ICR (income contingent repayment) plans.

Third, while REPAYE is open to anyone who has loans granted under the former Federal Family Education Loan Program (FFEL) system or via Perkins (whereby the money originated from banks who backed the loans, changes made in 2010 made DOE the lender and holder of the notes, making the borrower a pawn of the Federal Government); in order for the borrower to get into REPAYE they must agree to a consolidation and convert those loans into a Direct Loan (William D. Ford Direct Loan Program - owned and operated by the DOE in Washington, DC).

Fourth, Parent PLUS loans are not eligible for inclusion in  REPAYE, and must be paid under the terms agreed to by the lender and borrower.  

Fifth, while REPAYE seduces the borrower with such tinsel as removing the "Partial Hardship" requirement that was an eligibility requirement in prior programs, the fact remains that this repayment scenario takes the original 10-year term and extends it to 20 years! Well, yes, twenty years for undergraduate degrees.... but 25 years for graduate degrees.

Sixth danger! Beware of "The Old Bait and Switch".  Your Uncle's gift to you is this... yes you can switch into REPAYE from any of  the (4) older income-driven plans.  However, rub the sand out of your sleepy eyes first! Because any unpaid interest will be added to your loan principle which of course causes interest to accrue on a higher loan balance, and if you do consolidate your FFEL into REPAYE, all previous payments no matter how many years made, do not count towards the 20 or 25 year pay off period to earn  the promise of so-called "forgiveness".

Seventh drawback... REPAYE participants must update their income status annually. Now who wants to bet that if you fail to do so, and the Feds check your IRS returns and the income has changed, that they will cancel the plan and demand immediate pay-off?  Just thinking here... and knowing the "Grinch" as I do, I could see that happening to spoil someones Christmas.

Oh, and married borrowers can no longer "exclude" their spouses income!  That means you must include it in the yearly report, and pay accordingly based on combined incomes!

Finally, Santa and the DOE have one more trinket in their bag!  DEBT FORGIVENESS!
Yes, Virginia there is a Santa Claus!  But this Elf has a real treat in store for those who fall for this gimmick.

While stuck in a 20 or 25-year repayment plan and paying on those loans based on your income and having Big Brother checking in on your earnings, taking a mere 10% of your wages (until Big Brother changes the percentage?); the debtor glides along with visions of sugar plums and loan forgiveness dancing in their heads, only to come to face-to-face with Scrooge the collector!  Yep! And this Scrooge does not get a change of heart!

At the end of REPAYE, with the loan forgiven, the debtor is fully responsible for the TAXES on the amount forgiven!  Ho! Ho! Ho! 

(Can you agree there is nothing Merry about this? -- I think I will take the lump of coal, thank you very much!)

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