Dec
20
2021
Your 2021 Guide to Student Loan Forgiveness

Your 2022 Guide to Student Loan Forgiveness

By | Student Loans, student_loan | Comments Off on Your 2022 Guide to Student Loan Forgiveness

Editor’s Note: Since the writing of this article, the Biden administration has extended the pause on federal student loan repayment through December 31, 2022.

Student loan forgiveness was a hot topic on the campaign trail—but is one that is largely plodding along.

While President Joe Biden has endorsed $10,000 of federal student loan cancellation, few Republicans support blanket student loan forgiveness.

In June, Senate Majority Leader Chuck Schumer again urged Biden to cancel $50,000 in federal student loan debt for every borrower. Biden has asked the Justice Department and the Department of Education to assess whether or not he has the authority to unilaterally cancel student loan debt.

If the answer is “yes,” how much might he cancel? He has maintained that $50,000 is too much, especially given the relatively high incomes of graduates of high-tuition colleges.

Here are types of debt that have been canceled under Biden student loan forgiveness acts, and debt that may be forgiven in the future:

Loan Discharge for the Defrauded and Disabled

One major move Biden and his Education Department made in his first few months in office was discharging loans from for-profit institutions that defrauded students.

In March 2021, a decision was made to discharge nearly $1 billion worth of debt for 72,000 students. This was a continuation of a Trump-era policy, which had provided partial debt relief to those students.

The borrower defense to repayment program had been expanded under President Obama and trimmed under President Trump. This particular ruling applied to students who had had claims approved but had only received partial relief.

In June, the Biden administration discharged more than $500 million in debt for 18,000 former students of ITT Technical Institute, a for-profit school that closed in 2016. The administration is still working through a backlog of claims from the Trump administration.

The Biden administration also moved to forgive more than $1.3 billion worth of debt for 41,000 loan holders with permanent disabilities.

Advocacy groups say the move did not go far enough, and that the administration should forgive the $8 billion in debt held by over 500,000 borrowers who are considered totally and permanently disabled.

So what do these Education Department actions mean for those who do not fit under any borrower defense that has been invoked? The answer is still unclear, but the recent moves indicate that student loan reform is likely to be a key pillar of the administration.

The Latest on the Loan Payment Pause

The CARES Act in 2020 suspended payments and interest accrual on most federal student loans. The administrative forbearance was extended twice under Trump and again under Biden. The payment pause is slated to expire on Jan. 31, 2022.

Advocates see the next few months as an opportunity for the Biden administration to act quickly in terms of reform. Schumer and Sen. Elizabeth Warren have led the charge to urge Biden to continue the payment pause through at least March 2022.

But as of now, payments are on track to resume in February. This may be a good time for borrowers to plan how they will resume payments, look into forbearance or deferral programs if they are not in a position to do so, or consider refinancing with a private lender if they can get a better rate.

What Might the Education Department Cover Next?

On the campaign trail, Biden promised multiple student loan reforms. Some will likely have to be approved by Congress. They include:

• Free community college. In April, Biden promised to make good on that promise with the American Families Plan, which also would increase the maximum Pell Grant by $1,400.

• Overhauling the Public Student Loan Forgiveness (PSLF) program. Candidate Biden said he would streamline the program to make it easier for borrowers to qualify. He suggested $10,000 of forgiven undergraduate or graduate debt for every year of working in a nonprofit or public sector job, for up to five years.

People who have had qualifying public service roles would qualify for the program. The Department of Education is looking into PSLF claims, and Secretary of Education Miguel Cardona has called the current rejection rate “unacceptable.”

• Streamlining Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE) programs. On the campaign trail, Biden promised to simplify and streamline these programs, at one point suggesting repayments of 5% of discretionary income for people making over $25,000, with any remaining debt discharged after 20 years. As of this month, the Biden administration is reviewing these programs.

• Permitting student loan debt discharged in bankruptcy. Cases are circulating in the lower courts related to student loans and bankruptcy, challenging the status quo that student loans are rarely forgiven in a bankruptcy filing. But this month, the Supreme Court declined to review a case in which student loan discharge was denied.

Recommended: PAYE vs REPAYE: What’s the Difference?

Loan Forgiveness Plans Right Now

Federal student loan holders have forgiveness options if they meet certain criteria. The Education Department is likely to move forward on some reform fronts, but it may be challenging for certain acts to gain congressional approval.
In the meantime, here are some current programs:

Income-based plans. Income-driven repayment plans, which include PAYE and REPAYE, are meant to forgive any remaining student loan balance after 20 or 25 years of monthly payments that are tied to income and family size.

PSLF. Direct Loan borrowers working for a federal, state, local, or tribal government or nonprofit organization are to have any loan balance forgiven after making 120 qualifying payments. But debt discharge from PSLF has been notoriously challenging.

Disability discharge. Total and permanent disability relieves you from having to repay a Direct Loan, a Federal Family Education Loan, and/or a Federal Perkins Loan, or to complete a teacher grant service obligation.

“Undue hardship” alongside bankruptcy. While bankruptcy alone won’t keep a borrower from having to pay back federal or private student loans, a rare few may be able to prove that continuing to repay student loans imposes an “undue hardship” on them and their family.

Teacher Loan Forgiveness Program. Those who teach at a low-income school or educational service agency for five years and meet other criteria may be eligible for up to $17,500 in federal student loan forgiveness.

Closed-school discharge. If your school closes while you’re enrolled or closed shortly thereafter, you may be able to get your federal loans discharged.

Discharge due to death. If the borrower dies, or the person taking out the loan dies, loans may be discharged. This also applies to Parent PLUS Loans if the parent dies or becomes disabled.

Borrower defense to repayment. This is the umbrella under which many borrowers received forgiveness under the Biden Department of Education for loans from for-profit institutions. Direct Loan borrowers may receive forgiveness if a school did something or failed to do something related to your loan or the educational services that your loan was intended to pay for.

An attorney who specializes in student loans can be helpful in ensuring that a borrower meets the requirements of certain forgiveness scenarios and can help ensure that any paperwork is in order.

Can Private Student Loans Be Forgiven?

When it comes to private student loans, cancellation happens rarely, if ever.

Some private lenders do offer certain protections, such as unemployment protection, in case you were unable to make payments.

If a borrower cannot pay a private loan, they may speak to their lender to determine what programs and paths may be available.

Right now, it is unclear whether broad student loan forgiveness, by the presidential or congressional act, could include private loans.

Recommended: What Is the Student Loan Forgiveness Act?

The Takeaway

Biden student loan forgiveness has totaled more than $2 billion for particular borrowers, but some advocates want to see much more. Will the student loan forgiveness 2022 story be one of sweeping or incremental change? Time will tell.

And as of now, the pause on federal student loan payments ends in January. Knowing your options to repay your student loans, which may include refinancing with a private lender—resulting in one new loan, with an eye toward a lower rate—will be helpful in creating a path forward.

If you refinance your federal student loans with SoFi, you can lock in your rate now, and make no payments until February 2022.

It’s easy to check your rate on a refi with SoFi.

Photo credit: iStock/simarik

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

In our efforts to bring you the latest updates on things that might impact your financial life, we may occasionally enter the political fray, covering candidates, bills, laws and more. Please note: SoFi does not endorse or take official positions on any candidates and the bills they may be sponsoring or proposing. We may occasionally support legislation that we believe would be beneficial to our members, and will make sure to call it out when we do. Our reporting otherwise is for informational purposes only, and shouldn’t be construed as an endorsement.

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Sep
29
2021
Financial Planning

Should I Invest if I Still Have Debt?

By | Budgeting & Goals, Fresh Out of School, Growing Wealth, invest, Investing, Student Loans | No Comments

As you start to establish yourself financially, you may come to a crossroads: should you pay off debt or invest in your future? It can be confusing to know what to do in this situation, especially if you have multiple financial goals you’re saving toward.

The first step is to look at the numbers, then to consider your preferences. There is no one “right” answer to this question. Let’s start by taking a look at the numbers around major financial milestones like your student loan, buying a home, and saving for retirement.

Let’s say your student loan is $75,000. Buying a new home might cost $350,000, and you might plan to need $2,000,000 for a comfortable retirement. Everyone’s numbers will look a bit different, so feel free to take some time to calculate yours.

Once you’ve put your estimated numbers on a page, what jumps out at you? It’s hard not to notice that retirement is quite a bit more expensive than the others. This isn’t too much of a surprise if you consider what retirement is: living for decades with no salary.

While you might be tempted to put all your extra income immediately into your retirement fund, it’s not necessarily the winning decision when it comes to whether to pay off loans or invest. Let’s look deeper.

How Important is Paying Off Your Student Loans?

If you’re like the average student, you’ve borrowed $30,000 or more to pursue a bachelor’s degree . If you went on to graduate school, your student loan debt may be even higher.

Most federal student loans have a repayment period of 10 to 30 years. You may opt to make the minimum payment each month for the duration of your loan repayment plan, or you might decide to pay yours off early.

One benefit to paying off a student loan early is that you reduce your debt to income ratio (that’s how much debt you have compared to how much income you have). This might raise your credit score and help you qualify for other financial solutions.

Or, you might decide to continue paying your student loan while investing in other areas of your life, like retirement or buying a home.

Know Your Student Loan Interest Rates

Before you can decide whether to pay off student loans or save for other things, look at what you’re paying in interest for your student loans. If the rate you locked in when you took out your loan is higher than current rates, you might consider student loan refinancing. If you have multiple student loans, you could potentially consolidate and refinance them for a lower interest rate.

Of course, it’s important to keep in mind that refinancing federal student loans means you’re no longer eligible for federal benefits and protections, like income-driven repayment or loan forgiveness programs, so it makes sense to weigh the potential benefits and risks of refinancing before taking the plunge.

Comparing interest rates is an exercise in opportunity cost. Any decision to pursue one goal means you’re missing out on something else, but ideally, we look to minimize opportunity costs when assessing financial trade-offs. In this instance, the opportunity cost is leaving potential investment earnings on the table.

Let’s say you recently refinanced your student loan from 5% to 3.5%. Given the competitive rate on your newly refinanced student loan, you could consider continuing to make the monthly payment on your loan and allocating the extra cash flow elsewhere — like investing for retirement or buying a home.

Remember, we want to think about interest rates in terms of opportunity cost. What would it look like if you paid off your loan early? Your student loan costs you 3.5% annually, and that’s what you’ll “save” if you accelerate your payoff by $500 per month.

Once you paid off the loan early, you could invest your money in an asset class — such as the stock market — with the potential to earn a rate of return that’s higher than 3.5%. Historically, the stock market has returned an average of 10%. This investing can be done within a retirement account, whether a 401(k) or an IRA.

That said, stock market returns are erratic, and the annualized return figures you often hear quoted are just that — an average. Investing is risky, and there is always a chance that returns over the next five, 10, or 20 years will not outpace the interest that you are currently making on your student loan payment.

No one, not even a financial planner, has a crystal ball and can see into the future. This is why we also need to take into account your personal preferences.

If you feel like you are truly missing out on investing in an IRA or saving for a home, then investing in those things might be the right path for you. If your student debt makes you feel burdened and miserable, you could focus on that instead.

Paying Off Student Loans vs. Investing

“So, should I pay off student loans or invest,” you ask.

The answer is…it’s complicated.

Student loans often come with low interest rates, which means you’re not paying a huge amount of extra money over the years (like you would with a credit card, for example). So it’s low-cost debt. That means that if you want to invest in other areas of your life, such as saving for retirement or to buy a house, you may be able to do both.

Contributing to a Retirement Account

Many Americans are vastly under-saving for retirement, and with so many employers offering a 401(k) matching program, not contributing is like throwing money down the drain.

There is no standard for match programs — they can range from meager to generous. Between your contributions and your employer’s, it is often recommended that you save between 15% and 20% of your salary for retirement. You can do this by contributing the full allowable amount to your 401(k), which is $19,500 in 2021.

If you don’t have access to a 401(k) — perhaps you’re self-employed — you can save for retirement with other investment accounts like an online IRA or a brokerage account. No matter which account you use, you might want to consider putting that money to work with a long-term investment strategy. For example, you might choose to deploy a strategy of low-cost mutual funds that invests in stocks and bonds.

Buying a Home

Financial planners don’t all agree on whether a home is a good investment. That is not to say that a home is not a good financial goal; if it’s a priority to you, then it’s great. This is simply a commentary on whether a home produces a good return on investment.

Although a house may not have as high an investment return as other asset classes, such as the stock market, a house provides something that a stock or bond cannot — immediate utility. You cannot sleep and eat inside a stock or a bond.

While home values do typically grow over time, you must also take into consideration the costs of buying and owning a home, such as the interest paid on the mortgage, property taxes, and repairs and maintenance. That said, homeownership can be rewarding, and can pay major dividends down the line. One big benefit is having no monthly housing expenses (like rent or a mortgage) in retirement.

The Takeaway

There is no hard and fast rule when it comes to investing while juggling debt. Undoubtedly, the biggest ticket item you’ll need to invest for is retirement — but whether you invest in retirement before or after paying down debt depends on your personal preferences and situation.

One thing to remember: Financial tradeoff decisions don’t always have to be all-or-nothing. You might choose to split the difference by putting a little here and a little there. For example, you might contribute $300 per month to your 401(k) and $200 to a high-yield savings account for your down payment for a house, all while paying off student loans.

With SoFi Invest®, you can invest in traditional and Roth IRAs, crypto, or ETFs, with hands-on active investing or automated investing. The choice is yours — based on your personal situation, goals, and preferences.

Find out how to invest for your future with SoFi Invest.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Aug
17
2021
Closed School Loan Discharge Eligibility

Closed School Loan Discharge Eligibility

By | Debt Payoff, Going to College, Student Loans, student_loan | Comments Off on Closed School Loan Discharge Eligibility

The Department of Education allows federal student loan borrowers to seek a student loan discharge in certain circumstances. One such scenario involves a discharge related to permanent school cancellation.

If your college or university closes while you’re enrolled you may be wondering if you still have to repay loans you took out to fund your education. Closed school loan discharge can relieve you of the financial responsibility of repaying federal student loans.

There are certain eligibility requirements you need to meet to qualify for a closed school discharge. Understanding the guidelines, along with other options for student loan discharge, can help with managing your student debt.

What Is School Cancellation Loan Discharge?

The Department of Education can discharge up to 100% of federal student loans through the closed school discharge program.

The types of loans eligible for school closure discharge include:

• Federal Direct Loan Program loans (including Subsidized and Unsubsidized loans, consolidation loans, Parent PLUS loans and graduate PLUS loans)

• Federal Family Education Loan Program (FFEL) loans

• Federal Perkins loans

School cancellation discharge of eligible loans is not the same as loan forgiveness. Federal loan forgiveness programs, including the Public Service Loan Forgiveness program (PSLF) and Teacher Loan Forgiveness, have service and repayment requirements. With PSLF, you’re required to work in a public service job and make 120 qualifying payments toward your loans. Teacher Loan Forgiveness requires you to teach in a qualifying school for five consecutive years to be eligible for loan forgiveness.

A closed school loan discharge, on the other hand, imposes no requirements with regard to any minimum number of payments you need to make toward your loans or work service commitments. If you qualify, your obligation to make payments to your loans disappears.

Recommended: Types of Federal Student Loans

Who’s Eligible for Closed School Loan Discharge?

Borrowers may qualify for a school cancellation discharged if their school closed and they meet any of these conditions:

• They were enrolled at the time of the closure

• They were on an approved leave of absence when the closure occurred

• The closure occurred within 120 days of their withdrawal from the school and their loans were first disbursed before July 1, 2020

• The closure occurred within 180 days of their withdrawal from the school and the loans were first disbursed after July 1, 2020

Borrowers may not qualify for any discharge of student loans related to a school closure if:

• The student’s withdrawal happened outside the 120-day or 180-day windows allowed, based on the date of their first loan disbursement

• They are continuing education at another school

• They completed all coursework toward their degree before the school closed, even if they haven’t formally received a certificate or diploma

If any one of those things happens to be true then it’s possible a borrower won’t qualify for a closed school loan discharge.

How Does A Closed School Discharge Work?

If the school closes while a student is enrolled, they can apply for a federal student loan discharge. In general, students who meet the eligibility criteria will automatically receive an application from the Department of Education. The application is also available on their website.

Automatic Closed School Loan Discharge

School closure discharge is automatic if the school closed between November 1, 2013 and July 1, 2020 and the borrower hasn’t enrolled in another school within three years of the date of the closure. The Department of Education handles the closure for the borrower, there’s no need to complete the application. However, borrowers who would prefer to fill out the application, are able to do so.

Once your loans are discharged, the borrower is no longer responsible for paying anything toward them. But while an application for closed school discharge is under review it is important to continue making payments toward the loans as usual if they’re already in repayment. This can help avoid late payments.

Any discharged loans are removed from a borrower’s credit reports once the discharge is complete. That includes your entire payment history as well as negative items such as late payments.

Other Options for Discharging Student Loans

If you aren’t eligible to have your loans discharged because of school cancellation, there are some other scenarios that may allow it.

Disability Discharge

For example, you could apply for a discharge of your loans if you become totally and permanently disabled. The disability discharge option is available to eligible borrowers who owe:

• Federal Direct loans

• FFEL program loans

• Federal Perkins loans

It’s also open to TEACH Grant program recipients. In order to be eligible for a student loan disability discharge, you must be able to provide proof of your disability through a physician, the Social Security Administration, or the Department of Veterans Affairs. You’ll need to complete a separate application for this type of discharge and once approved, you’re subject to a three-year monitoring period to certify that you lack sufficient income to pay your loans.

Discharge in Death

Student loans can also be discharged due to the death of the borrower. That includes loans taken out by a student as well as Parent PLUS loans. In the case of Parent PLUS loans, discharge is an option if the parent who took out the loans passes away. To qualify for a death discharge of student loans, proof of death (i.e. a death certificate) must be submitted to the Department of Education.

In Rare Cases: Declaring Bankruptcy

Though it is rare, bankruptcy may be another option for discharging federal student loans, though it can be difficult to achieve. In order to have student loans discharged through bankruptcy, the borrower must be able to prove through an adversary proceeding that having to repay their loans would cause a sustained undue financial hardship for both themselves and their family.

Filing a bankruptcy case could result in all of the loans being discharged, some of them being discharged or none of them being discharged. Declaring bankruptcy adversely affects a person’s credit score and is generally a last resort. Always consult with a qualified and trusted financial advisor, accountant, or attorney before considering bankruptcy.

Other Options for Managing Student Loans

Federal student loan borrowers who are ineligible for other forms of discharge or student loan forgiveness may want to consider alternative options such as income-driven repayment options or student loan refinancing instead.

Income-driven repayment plans are offered to borrowers with federal student loans and consider a borrower’s discretionary income when determining their loan terms and payments. This can help make monthly payments more manageable but may make borrowing the loan more expensive over the life of the loan by extending the loan term.

Student loan refinancing may allow qualifying borrowers to secure a more competitive interest rate or loan terms. Though, keep in mind, refinancing any federal student loans will eliminate them from federal plans and protections, including income-driven repayment plans and closed school loan discharge.

Does School Closure Discharge Apply to Private Student Loans?

Federal closed school discharge applies to federal student loans only. Borrowers with private student loans wouldn’t be able to apply for a discharge through the Department of Education should their school close.

It may be possible to contact your private student loan servicer to see if any type of discharge option is available. Your lender may be able to offer a solution for handling private student loans if your school closed while you were enrolled and you have no plans to re-enroll elsewhere.

The Takeaway

Closed school loan discharge can help erase federal student loan debt, in the event a qualifying borrower’s school has closed. But if your school remains open or you have private student loans, you may need to consider other possibilities for keeping up with your payments.

Refinancing student loans could help borrowers secure a lower interest rate. Know that refinancing a federal student loan into a private loan eliminates it from federal student loan borrower protections, like income-driven repayment plans, deferment, and loan forgiveness options. So it may not be the best option for everyone.

If you’re considering student loan refinancing, take the time to look around for the best loan rates and repayment terms for you. SoFi, for example, offers competitive student loan refinancing rates with no hidden fees. Weighing student loan refinancing alongside other options can help make your loans more manageable.

Learn more about student loan refinancing with SoFi.

Photo credit: iStock/jacoblund

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SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Jul
01
2021
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Consequences for Late Student Loan Payments

By | Debt Payoff, Student Loans, student_loan | Comments Off on Consequences for Late Student Loan Payments

If you fail to make a student loan payment by its due date, your loan becomes delinquent, and there are all sorts of consequences that can result, from late fees to having your loan sent to collections. These consequences will typically depend on how long your loan is delinquent and whether you have a federal student loan or a private loan.

If you miss a student loan payment, take action immediately so you can work to avoid these consequences.

Federal Student Loan Late Payment Penalties

If you fall behind on federal student loan payments, you can expect the following consequences:

Late Fees

Your loan becomes a delinquent payment the day after you miss a payment. During the first 30 days of your delinquency, your loan servicer may charge you a late fee penalty. Your loan servicer will determine when to charge you a penalty and how much to charge.

Damaged Credit

If your loan is delinquent for 90 days or more, your servicer will report the late payments to the three major national credit bureaus—Experian, TransUnion, and Equifax—which keep track of consumer credit scores.

A delinquent loan can potentially damage your credit score. A lower credit rating can make it more difficult to open a credit card, take out loans to buy a house or a car, and limit your ability to obtain other types of consumer credit.

A low credit rating means that lenders likely see you as a greater risk. As a result, borrowers with a less than stellar credit score may qualify for a high-interest rate or be subject to less favorable terms for lines of credit or loans than a borrower with a more competitive credit score.

Credit scores can impact other areas of life too. For example, someone with a low credit score may have trouble signing up for homeowner’s insurance options and utilities or even getting approved to rent an apartment.

Recommended: How Do Student Loans Affect Your Credit Score?

Default

If your loan is delinquent long enough, it can go into default. The timeline for this varies depending on the type of loan you have.

After 270 days of delinquency, loans made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program go into default.

For loans made in the Federal Perkins Loan Program, a default may be declared more quickly such as soon as a payment is late.

Borrowers with a Perkins Loan, which stopped being made by the federal government in 2017, can contact the school that made the loan or the school’s loan servicer to learn more about repayment requirements.

Once a federal loan goes into default, it can trigger the following consequences, among others:

•   The entire loan balance becomes due immediately, including any interest that you owe. This is a process known as acceleration.
•   Deferment or student loan forbearance, which allow borrowers to temporarily suspend loan payments, are no longer options. Borrowers may also lose the ability to choose a repayment plan.
•   You lose eligibility for additional federal student aid, so you won’t be able to take out federal student loans in the future should you decide to go back to school.
•   Your transcript is the property of the school you attend, and your school is allowed to withhold it until you are out of default.
•   Your tax refunds may be withheld to repay your defaulted loans. This process is known as a Treasury offset. The government will send a notice of intent to your last known address before these offsets begin, and they will continue until your loan is repaid or the default status of your loan changes.
•   Your employer may be forced to garnish your wages. This means that they will withhold up to 15% of your paycheck and send it to your loan holder to repay your loan. The government will send a notice that explains the intent to garnish your wages in the next 30 days. At this point you may have a chance to enter into a voluntary repayment agreement.
•   You may be taken to court by your loan holder, and you may be liable for court costs, collection fees, attorney fees, and other costs.
•   You are liable for the cost of collecting your defaulted loans. Your default loan may be placed with a private collections agency, which may charge 17.2% of your outstanding balance, including interest and fees. Before your loan is sent to collections, the Department of Education will send you a notice explaining how to avoid this outcome and how to avoid having it reported to the credit bureaus. Having a defaulted loan turned over to a private collections agency can significantly increase the total cost of the loan. That’s because when you make a payment after your loan has been sent to collections, the 17.2% collections cost is taken out first and the remainder is put toward paying off your loan.

Recommended: Types of Federal Student Loans

Private Student Loan Late Payment Penalties

When you miss payments on private student loans, you may face similar consequences as when you miss federal payments. However, private lenders can choose the actions they pursue, and they may operate on completely different timelines.

For example, they may report late payments to credit bureaus or declare that a loan is in default faster than with federal loans.

Private lenders do not have the option of accessing your tax refund to pay back your defaulted loan. However, they can take you to court to gain the ability to garnish your wages.

Lenders may have different policies when it comes to late or missed payments on student loans so check with your lender directly if you have questions about a private student loan.

What To Do If You Miss A Payment

First things first: When you miss a payment, contact your lender immediately and let them know. This is your chance to clue them into any financial hardships that you might be experiencing. For example, if you missed a payment due to job loss or a medical emergency, there may be things your lender can do to help.

If paying off your loans looks like it will be difficult for the foreseeable future, consider deferment or forbearance. Federal student loan deferment is a program offered by the government that allows you to pause student loan payments for up to three years.

The deferment can give you time to put your finances back in order so you can start making regular payments again. Those with direct subsidized loans won’t usually be responsible for paying the interest that accrues over the deferment period. On the other hand, those with unsubsidized loans, are on the hook for those interest payments.

Forbearance can allow you to stop making payments for specific periods. This program can help you if you’re facing short-term emergencies. Unfortunately, interest continues to accrue on your loans, adding to your total cost over time.

Private lenders may or may not have an option that allows borrowers facing financial difficulties to pause their payments.

If you have a federal student loan in default, consider enrolling in a student loan rehabilitation program. To rehabilitate a defaulted Direct Loan or FFEL Program Loan you’ll enter into an agreement with your loan holder under which you’ll make nine affordable monthly payments, each within 20 days of its due date. And you’ll need to make all nine payments during a 10-month consecutive period.

To rehabilitate a Perkins loan, you’ll have to make full monthly payments each month (within 20 days of the due date) for nine consecutive months. Your loan holder will determine the monthly amount you’ll pay.

The Takeaway

Late student loan payments can have consequences for borrowers. For many federal loans, after 90 days of missed payments, the late payments will be reported to the three major credit bureaus. This has the potential to negatively impact an individual’s credit score.

After 270 days of missed payments, a borrower’s loan will be placed in default where additional consequences can kick in. These consequences can include the full total of the loan being due immediately, wage garnishment, and more.

The consequences for late payments on private student loans may vary by lender but can include things like late fees and the loan being sent to a collections agency.

Taking Action

Missing a student loan payment can lead to some serious consequences, especially if you let it go for too long. Understanding the consequences and taking action immediately can help you avoid some of the most serious effects and keep you on track to eliminate your debt.

If the cost of a student loan has become too much, one option borrowers may consider is refinancing to a loan with better terms and a lower interest rate.

Note that refinancing is not the right option for everyone, and borrowers who have struggled to make payments on an existing loan or have a low credit score may not qualify for more competitive terms on a refinanced loan.

Refinancing a federal loan also results in the elimination of federal benefits, such as deferment or forbearance which may be useful tools for borrowers who are struggling to make on-time payments on an existing student loan.

Check out SoFi to learn more about the refinancing student loan options available.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE THAT THE WHITE HOUSE HAS ANNOUNCED UP TO $20,000 OF STUDENT LOAN FORGIVENESS FOR PELL GRANT RECIPIENTS AND $10,000 FOR QUALIFYING BORROWERS WHOSE STUDENT LOANS ARE FEDERALLY HELD. ADDITIONALLY, THE FEDERAL STUDENT LOAN PAYMENT PAUSE AND INTEREST HOLIDAY HAS BEEN EXTENDED TO DEC. 31, 2022. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE THE AMOUNT OR PORTION OF YOUR FEDERAL STUDENT DEBT THAT YOU REFINANCE WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.

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2021
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The Student Loan Discharge Process Explained

By | Debt Payoff, Student Loans, student_loan | Comments Off on The Student Loan Discharge Process Explained

Being able to forget about a debt altogether—instead of having to pay it back—sounds like a dream come true. But waving goodbye to some types of debt doesn’t always require a Fairy Godmother. For those who qualify for a student loan discharge, it can be possible to make some or all student debt disappear.

Student debt forgiveness, cancellation, and student loan discharge all refer to programs that allow graduates to stop paying off their student loans and cancel out any remaining debt.

There are some slight differences between forgiveness, cancellation, and discharge, generally having to do with the reason for which the debt is discharged.

In each case though, the end result is the same: having a student loan forgiven, canceled, or discharged means no more loan payments and an outstanding balance of zero dollars.

Who Qualifies for Student Loan Discharge?

Student loan forgiveness programs are offered by the federal government for certain individuals working in some public service jobs, including some teaching positions.

With the average annual cost of tuition, fees, room, and board coming in at an average of $21,950 for individuals enrolled in in-state public institutions in 2019-2020, and $49,870 for those attending private schools, it’s unsurprising that many people have to borrow money to fund their education.

The Federal Reserve estimates that some 55% of people under 30 who attended college—and 31% of all adults—had to incur some debt to pay for their schooling, while in all, the total value of all student debt in the U.S. was worth a whopping $1.7-trillion dollars as of December 2020.

While many of these individuals will have to repay their student loans, some may qualify for student loan discharge and forgiveness programs.

Individuals may also apply for a federal student loan discharge under certain circumstances such as total and permanent disability, school closure, and, in some cases, bankruptcy.

Student loan discharge programs are intended for individuals with federal student loans. But the type of loan matters too. With the exception of Borrower Defense to Repayment, which is available for Direct Loans only, all of the below discharge programs are available for both Direct and FFEL Program loans.

Perkins Loans have their own forgiveness and discharge programs, though most of the below scenarios qualify. Note that the Perkins Loan program ended in 2017.

There are no blanket programs or rules about private student loan discharge. While some lenders will discharge a student loan in the event of disability or death, there are no regulations obligating them to do so.

Recommended: What Is the Student Loan Forgiveness Act?

Types of Federal Student Loan Discharge Programs

The federal government offers a number of programs for canceling or discharging student debt.

Forgiveness/cancellation programs are generally available to individuals who:

•   work in the public sector, for a government or not-for-profit organization
•   or for full-time teachers at low-income schools or educational services agencies, who have been employed there for five full consecutive years.

There are also a number of circumstances under which an individual may qualify to have their student loan discharged. Read on for more details on the different reasons federal student loans may be discharged.

Recommended: Types of Federal Student Loans

Closed School Discharge

Individuals may be eligible for a 100% discharge on some types of student loans if their school closes while they are still enrolled or soon after they withdraw. Students on an approved leave of absence at the time of school closure are still eligible.

There are some exceptions:
•   For loans disbursed prior to July 1, 2020, an individual may not have withdrawn from their program more than 120 days before the school closure (180 days prior to closure for loans disbursed after July 1, 2020)
•   The individual may not have completed the coursework for their program prior to the closure
Students cannot transfer to another school to complete the program or do so via other means

Total and Permanent Disability Discharge

In order to qualify for a total and permanent disability discharge, an individual must be able to provide documentation that they have become totally and permanently disabled. There are only three allowed sources that can provide the documentation required to qualify:
•   the U.S. Department of Veteran Affairs
•   the Social Security Administration
•   or a physician

Each of these sources carries unique requirements in order to verify eligibility.

Recommended: Student Loan Disability Discharge Eligibility

Discharge Due to Death

A federal student loan may be discharged with acceptable proof of death. Documentation such as a death certificate generally qualifies as acceptable proof of death.

Discharge in Bankruptcy

Though not automatic, it is possible to have a student loan discharged in the event of Chapter 7 or Chapter 13 bankruptcy. This discharge requires a separate legal action, called an adversary proceeding, in which the court must agree that having to continue to repay the debt would impose an undue hardship on the individual.

In addition to discharges granted due to an individual’s personal circumstances, there are also some scenarios where the school’s actions may confer eligibility. These include:
•   Borrower Defense to Repayment: if the school engaged in certain types of misconduct based on certain state laws
•   False Certification Discharge: if an individual’s school falsely certifies their ability to receive a loan
•   Unpaid refund discharge: if an individual withdraws but the school does not return loan funds as required

Recommended: Bankruptcy and Student Loans: What You Should Know

The Takeaway

There are a few programs that allow eligible borrowers to discharge their student loan debt. For private student loans, there is no universal rule or regulation governing discharge.

While getting rid of student debt would indeed be a dream come true for most people, the stringent requirements for receiving federal student loan discharge means many people are not eligible.

But that doesn’t mean there aren’t other ways to reduce the burden. Refinancing a student loan is one way to help lower the total cost of student debt by tapping into more favorable interest rates for qualifying borrowers, which could reduce the total amount of interest paid.

The benefits of federal student loans are eliminated when the loan is refinanced, so those pursuing federal loan forgiveness, and others, may not want to refinance.

Learn more about whether student loan refinancing is the right option for you.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE THAT THE WHITE HOUSE HAS ANNOUNCED UP TO $20,000 OF STUDENT LOAN FORGIVENESS FOR PELL GRANT RECIPIENTS AND $10,000 FOR QUALIFYING BORROWERS WHOSE STUDENT LOANS ARE FEDERALLY HELD. ADDITIONALLY, THE FEDERAL STUDENT LOAN PAYMENT PAUSE AND INTEREST HOLIDAY HAS BEEN EXTENDED TO DEC. 31, 2022. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE THE AMOUNT OR PORTION OF YOUR FEDERAL STUDENT DEBT THAT YOU REFINANCE WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.

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