More About Student Loans and Bankruptcy – Forbearance, Deferment or Discharge

Katherine: Hello everyone, we’re being joined by our friend, Attorney Ronald Drescher, and he talked with us a great deal about student loans and bankruptcy, which made my mouth drop. We’ve heard before that student loans … You’re just doomed. You either pay them or they make your credit bad. Welcome back, Attorney Drescher. How are you?
Ron: Thank you. I’m doing great.
Katherine: I want us to pick up our conversation where we left off still talking about student loans and bankruptcy, but I want to start with this question because this is what I know personally. Deferment and forbearances have been the way to, I guess, delay the problem, but I want to know. Why doesn’t it solve the problem?
Ron: All right. We’re going to be talking about the federal side now for student loans. We’re not going to be talking about private side because it’s that’s really a completely different kind of a loan. On the federal side, you’re allowed per loan three years of forbearance and three years of deferment. You know what? That’s very helpful to have that as an option when you are in real trouble, but the reason why it’s not necessarily the best way to go is because of the existence of the income-driven repayment programs that have become really prevalent in the last eight years or so.

Because the programs focus on your income to drive what the payment amount is, if you’re not making anything, if you’re making zero dollars, you’re going to pay zero dollars based upon your income. The reason why it’s better to pay zero dollars in an income-based repayment program than zero dollars in forbearance, is that all of the income-based repayment programs have a discharge date built into them. For many, it’s twenty five years, for some, it’s twenty years, for others, if you’re working for a nonprofit or for the government, it’s ten years.

What’s going on is if you’re in forbearance or deferment, you’re not getting the benefit of the time that’s passing … on the discharge schedule. That’s really huge. Now some people will say, “Well, twenty five years, that may as well be another lifetime.” Well, listen, if you’re graduating from college, you’re twenty-four years old, you’re kind of trying to make your way out in the world, twenty five years, you’ll be forty-nine when that’s done. You still got a lot of really great income producing years ahead of you when you’re forty-nine years old.

Don’t kid yourself. There’s a tremendous benefit knowing that when you’re forty-nine, you’re going to be debt-free of your student loans. Like I said, the prospect of twenty five years seems like so long to wait. That’s more a question of the perception of a young person than the reality, which is that twenty five years is okay. You’ll still have plenty of great earning years ahead of you after that.

For my clients, I want them to start that clock ticking on the twenty five years as soon as possible. Let’s say they work as a teacher or a firefighter or they work for Social Security or for the government or something, well, it’s a ten year period. Why go on deferment or forbearance when you could be doing an income-based repayment program? In ten years, you’ll discharge your loans. To me, it’s defeating. It’s self-defeating to do a forbearance or a deferment when you could be ticking that clock away towards the eventual discharge of the debt.

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Katherine: What I’m understanding you to say is depending on my situation whether I’m a teacher or whatever job I have, they’re going to base my payments on what I’m making and coupled with the actual discharge time … I like the teacher ten year plan there. If I’m making payments for ten years, at the end of the ten years, whatever’s left is discharged? Is that what I’m understanding?
Ron: That’s correct.
Katherine: Interesting. Yeah, we’ve been getting some information standing by the water cooler that does not sound anything like what you’re talking about, Attorney Drescher. Again … I’m wowed by that. Many of us have been told, “Put it into deferment or get a forbearance.” What you’re saying is with doing one of those options, it’s putting pause on it and stopping the clock. It’s not going against the time that would allow us to get that discharged, so we’re delaying it, right?
Ron: That’s right. I mean, a forbearance and deferment, in my opinion, should only be used in a worst case scenario. Now for example, here’s a situation. Let’s say you lose your job and you need to go … you need to recalculate the amount you have to pay based upon your income-based repayment stream. Now if you lose your job and you’re not getting any money in, then you’re going to pay zero. Maybe you want to go on forbearance for a month or two while your servicer processes your new paperwork to recalculate your income-based repayment.

That’s a good use of forbearance or a deferment. I mean, if you’re making fifty thousand dollars a year and you’re paying five hundred dollars a month based upon that salary and all of a sudden you go down to zero for an indefinite period of time, it is going to take a couple of months for the servicer to catch up with your new paperwork. While that servicer is catching up, that’s a good time to go into forbearance or deferment so you’re not still paying the five hundred dollars a month while you have no money coming in.

Katherine: Got you. That leads me to my next question. I’m glad you brought that up, what if I go from having a job to not having a job, but many graduates can’t even find a job to begin with to begin making that first payment in their field. I’ve heard that about many people. “Oh, yeah, I have a degree with this college or whatever, I just have loans. I have never worked in my field or I can’t find work in my field.” What do you recommend? What do you say those graduates can do? You’re automatically triggering your loan payments whether you are in your field or not, right?
Ron: Assuming these are federal loans and not private loans … I mean, private loans are totally different, but assuming that they are federal loans, and by the way, about eighty five to ninety percent of all student loans are federal loans. Assuming that they’re federal loans, just go right into an income-based repayment program based upon a zero dollar or a minimal salary. What’s interesting about income-based repayment programs is that they don’t look at the amount you owe at all to determine what you have to repay.

They only look at the amount you earn and your family size. Now, that opens up a lot of interesting prospects. Let’s say you’re a stay at home mom or a stay at home dad and your spouse is the one that’s out there earning. You’re taking some time off to work inside the home. Well then, for those few years … you could file your taxes married but filing separately and you can pay zero dollars on an income-based repayment program and the clock is ticking towards the twenty five year discharge.

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Katherine: For those who may be concerned about wage garnishment, what has to happen before your wages can be garnished?
Ron: Okay, let’s talk about that. That’s also really important and that’s also completely different than the federal system from the private system. I want to talk about both because it’s really important. In the federal system, if you’re in default … and a lot of people go into default just because they’re kind of intimidated by the whole student loan servicing process. They don’t know the first call to make and the first person to talk to, so they kind of put their head in the sand. You know what? That’s understandable, but there’s some really scary consequences.

Anyway, you have two hundred and seventy days from the time you stop making a payment and you’re in a delinquency period. During those two hundred and seventy days, they’re not going to garnish your wages. At the end of the two hundred and seventy days, you then go into a default phase and you have another thirty day grace period. At the end of that thirty day grace period, they can begin to administratively garnish your wages. They don’t have to sue you, they don’t have to get a judgment.

All they have to do is … I mean, it’s the United States government. They’re a super creditor, so that’s very powerful. There are ways to get out of that and you need to get out of that in a hurry, but that’s what happens on the federal side. On the private side, it’s like any other kind of a loan, like a credit card loan. The private lender needs to give you notice of your default. They need to file a lawsuit, they need to win the lawsuit, they need to get a judgment, they need to find out where you work, and then they need to garnish your wages. It’s a completely different process in the private side than on the federal side.

Katherine: Those are good notes to have. What I’m feeling is relief, Attorney Drescher … I’ve heard so many people you hear in commercials when you ride in the car about people just feeling bad about this debt … Of course, we have the political arena going on right now it being an election year and they’re talking about debt-free schooling. Of course people are … out of fear … they feel like there’s no way out, so yes, the candidate that can get me debt-free education, I want to vote for them.

I’m not saying that that’s a bad campaign, but for those who don’t have the debt-free schooling under their belt, they have a debt, they have debt-full, they have more options other than pressing the pause button and delaying, delaying. I had no idea about the automatic discharge was built into the loans and I’m sure many of our listeners didn’t know that, either. We’re getting to the end of our time with you. There’s a few things I want you to do because this would raise some more questions than what we shared in this interview today. I want you to tell people how they can get in touch with you because they have other questions, and then I want you to tell them about your book that you have, okay?

Ron: Well, the two best ways to get in touch are by telephone: 410-484-9000. We’ll be happy to talk to you. You can go to my website for more information. That’s www.drescherlaw.com. We have a lot of information there. I put out a lot of content. We wrote a book called “File Bankruptcy and Get Rich”. I use that title to kind of catch people’s attention. I try to look at bankruptcy … Listen, there’s always an emotional aspect of bankruptcy. There’s an emotional aspect, there’s a legal aspect, there’s a moral aspect.

I try to focus on the financial aspect. If you don’t want to file bankruptcy and you want to continue to pay the minimums on your credit cards, I totally respect that. I just think that it’s my duty to show you what that choice is costing you in dollars and cents. If after you’re fully informed, you decide you want to continue to do what you’re doing, you know what? Like I said, I respect that and I think you have every right to do that …

It’s the same thing with trying to keep your house. A lot of people … We’re not fully recovered from the housing bust from 2008. People are still living in their over-leveraged house and they’re not building equity. They’re falling behind on their mortgage and they’re trying to work out a payment plan or a loan modification. Giving up the family home is just a huge emotional and psychological thing.

I really … I’m very sympathetic to that. Once again, it’s my job to show you what it’s costing you to make the decision to try to heroically save that home. If after we’ve gone through all those numbers, you decide you want to continue to work to save that home, I’m here to help you try to do that. I do feel I want to clear the veil from the eyes and really look at things clearly. That’s what my book is all about.

Katherine: Awesome. Do they call to get the book? Can you give that … I want that to be the last thing they hear. How do they get a copy of that book?
Ron: Once again, you go ahead and give us a call, ask for a copy of the book: 410-484-9000. Go to www.drescherlaw.com. You can fill out a web form and we’ll be happy to send you a copy of the book.
Katherine: Awesome, Attorney Drescher. Until next time, have a wonderful day. Thank you so much.
Ron: Well, thank you very much. I really enjoyed it. As always.
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