Some of the Federal subsidy programs were created to help very specific groups of loan holders.  The repayment programs created to assist those individuals who are experiencing personal hardship – such a under-employment or unemployment were created to apply to much broader groups of individuals.  This section of the knowledge vault will provide you some of the important detail.


What if I cannot afford the loan payments?

  • You can reduce and simplify your payment using one of two consolidation plans: (i) Federal Family Education Loan (FFEL), (ii) Federal Direct Consolidation Loan (aka: Direct Loan).
  • Federal Direct Consolidation Loans are designed for those who cannot afford to service (pay) their existing student loans. Payments are based on annual family incomes. Borrowers with family annual incomes of less than $900 above the poverty level do not make payments on the loan. Once you get the loan the old loans are retired. You’re eligible for new loans, grants, and deferment; you will no longer be listed as in default on credit records, and will not be subject to tax intercepts, garnishments, or other collection efforts.
  • A Direct Loan has several advantages over the FFEL. It is easier to qualify because it is unnecessary to make three regular payments before qualifying – as is required to obtain a FFEL loan. The Direct Loan offers lower payments than a FFEL plan and borrowers with Direct Loans may be in a better position when seeking deferments. Direct Loans offer lower interest rates over the life of the loan than those offered by a FFEL. The lower income of many Direct Loan borrowers may enable zero monthly payments or vey low monthly payments. These lower payments may not cover accrued interest. The amount of the loan is increased to include the unpaid interest. After interest is charged on the accrued interest the loan balance can increase significantly.
  • There are some positive features of the Direct Loan program, however, some of these merits are offset by other conditions. Borrowers may seek loan deferments during which period the government pays the accrued interest. A cap is placed on interest after 25 years of payments (even if payments were zero over the entire period). However, periods of deferment or forbearance, during which the borrower is excused from making payments, are not counted. Note: when the loan is forgiven the amount of the loan has to be counted as income on your tax return.

Can bankruptcy help me avoid my student loans?

  • In most cases bankruptcy is not a viable means to discharge your Federal Student Loans. Under certain limited circumstances you can discharge your obligation through bankruptcy. The criteria can be found in 11 U.S.C. 523 (a) (8). For example your loan may be discharged only if the first payment became due at least seven years before the bankruptcy was filed.

When can I cancel or discharge a student loan?

Generally speaking, there are only two ways to avoid paying a loan issued under Title IV of the Higher Education Act; Death or Disability. A loan can be canceled if you die or become permanently and totally disabled. However, you cannot be considered disabled on the basis of a condition that existed when you applied for the loan unless it has substantially deteriorated. Stafford, Parent PLUS, and SLS loans disbursed after January 1, 1986 can be canceled under two additional circumstances:

  • The school you attended improperly certified your ability to benefit from the training given, or the school you attended closed while you were in attendance or within 90 days after you withdrew from the school

Discharge Cont’d

In addition, a National Defense Student Loan can be canceled if you enter into full-time teaching or military service. A National Direct Student Loan and a Perkins Loan can be at least partially canceled if you become a Head Start Program Staff Member or a Peace Corps Volunteer, a Peace Corps Member or VISTA Volunteer, a full-time law-enforcement or corrections officer (for loans received after 11-29-90), entered a full-time teaching position, became a full-time nurse or medical technician (for loans disbursed after 7-23-92), or
are a full-time employee of a public or private non-profit child or family services agency (if your loan was disbursed after 7-23-92).

How do I apply to cancel or discharge my loan?

  • First find out who is currently holding your loan. You may contact the Federal Student Aid Information Center at 1-800-433-3243 (1-800-04-FED-AID). If the guarantor agency has the loan you should take action. If the Department of Education is holding the loan, deal directly with that organization. If the Department has referred your loan to a collection agency, inform the agency in writing that you are contesting the debt by filing for a discharge by the Department of Education. If you defaulted on a Perkins Loan, it may still be held by your college and you should contact them for more information.
  • The process to seek a discharge is detailed, includes legally binding statements and documentation. See the Department of Education website for additional details.

Who qualifies for discharge due to school closure?

  • The Higher Education Act defines the provisions for discharge. Your school (or the branch which you attended) closed while you are still either enrolled or on an approved leave of absence, or you withdrew from the school within 90 days of its closure. However after the school closed, you must not have completed the program of studies through a “teach out” at another school or by transferring academic credits or hours earned at this closed school to another school.
  • If your loan is discharged, you will no longer owe any future payments, and you should be eligible for a refund of past payments. Moreover, the servicing agency will inform credit reporting agencies that the loan was discharged. Thereafter, any payment history impacting your credit report should be expunged. You will be eligible to obtain federal student financial aid.

Who qualifies for discharge due to false certification?

If you do not have a high school (or equivalent) diploma, and were admitted to a school after July 1, 1987 you may be eligible to obtain a false certification discharge. The United States Department of Education may determine the school falsified your ability to benefit from the program unless you established one of the following: (i) passed an “ability to benefit” test, (ii) successfully completed a program of developmental or remedial education provided by the school, (iii) enrolled before July 1, 1991 and received a GED before completing your program of instruction.

Are there penalties for early payment or if the loan is paid before scheduled deferment begins?

There are never early payment penalties for federal student loans

Can my wages be garnished?

Yes, the techniques utilized by collection agencies can be aggressive. You may experience high pressure phone calls. Most employers take a very negative attitude toward their employees who are receiving collection calls at work. Tactics used by these agencies can include:

  • Garnishment of wages: this is a popular tactic. It is a simple process for the collector. You could lose a percentage of your income during every pay period and the amount could be much higher than your normal monthly payment. Recent government rules have made it even more difficult to resolve a student loan once it is in garnishment. If you are facing the possibility of garnishment don’t wait to call. We can usually stop it before it starts, depending on where you are in the garnishment process.
  • Heavy penalties and collection charges: defaulted student loans carry heavy penalties that can quickly increase the balance of your student loan and double or triple the amount owed in just a few years. When the student loan goes into default, there is a twenty five percent default fee that is attached very quickly.
  • Loss of Income tax refund: seizure of your income tax refund is another very common practice of student loan guarantors and collection agencies. Our program will stop this from happening.
  • Credit rating: one of the most detrimental entries on your credit report is a student loan in default. You may not qualify for a home mortgage or may pay a high penalty to qualify. This will also increase your borrowing costs in other areas.
  • Revocation of Driver’s License and/or Professional License: many states are now revoking or refusing to renew driver’s licenses and/or professional licenses of individuals who have student loans in default. Eliminate this possibility with our program.
  • Lawsuit initiated by the Federal Government: in addition to the defaulted status on your student loan, you could be summoned to court by the federal government resulting in a judgment being placed on your record damaging your credit even further. These judgments can be renewed every seven years. You could avoid a lawsuit by taking care of your student loan through our program.
  • Ineligibility for additional financial aid: as long as you have a defaulted student loan you will be ineligible to receive any additional financial aid or student loans to continue your education.

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