July 23, 2017

What Can I Do About Private Student Loan Debt?

private student loan debt - drowningOne of the more vexing problems in my student loan practice arises from questions about private student loan debt. In my view, private student loans are just about the worst type of debt imaginable. With very limited exception, you cannot discharge them in bankruptcy and collection agencies often use very aggressive collection tactics.

Often collection agencies act even more aggressively than they would for general unsecured debt like credit cards because the bankruptcy option is most likely not available.

Generally student loan borrowers only turn to private student loans when they have exhausted their federal student loan money. When I speak to high school students and their parents I point out that if they are considering private loans to pay for college, that is a sign that the college they are considering is too expensive or not a practical choice because of the negatives associated with private loans. These negatives are magnified even further if the private student loan lender demanded a co-debtor, like a parent, spouse or sibling. [Read More…]

Student Loan Workout Should Precede IRS Workout (Usually)

IRS monsterHow should you prioritize your payments when you have both tax debts and student loan debts? According to attorney Shawn Wright, a Pittsburgh, PA lawyer who represents clients in tax matters, student loan workouts and bankruptcy, you should apply for a student loan workout first, and thereafter apply for an offer-in-compromise or installment agreement with the IRS.

As Shawn notes, the IRS’ “Fresh Start Initiative allows taxpayers to include student loan payments as approved expenses in an IRS workout budget. This is a change from prior policy. In other words, when you apply for an IRS settlement, you have to submit a budget. The IRS will only acknowledge reasonable and necessary budget items – anything else will be considered disposable income that you can use to pay the IRS.

As of May 21, 2012, student loan expenses may be included in an IRS settlement budget. Other expenses, like credit card debts and personal loan repayments cannot be claimed at all on an IRS settlement budget. Further, the IRS limits what you can claim as “necessary” in categories such as housing, transportation and utilities. [Read More…]

Loan Modification Help on the Horizon for Private Student Loan Borrowers?

struggling student loan borrowerWhen talking to potential clients seeking information about repayment options for student loans, one of the first questions I ask has to do with whether the student loans are government issued or government insured, or if the loans are private loans.

If the loans are government loans – owed or managed by the U.S. Department of Education, we have a variety of options set out in federal law. Although the rules are not consistent among the various types of federal loans, for the most part, we have the option of curing defaults, restructuring payments based on the borrower’s income, getting some or all of the loan forgiven based on the borrower’s employment, and otherwise avoiding wage garnishment or bank account levy.

Basically, the Department of Education offers many options to help put struggling student loan debtors back into non-defaulted payment status. The rules to effectuate this goal are not always clear or consistent but that is the goal.

Private student loans are another story. None of the borrower friendly payment modification or default cure provisions set out in federal law apply to private loans. In fact I would go so far as to say that private student loans are one of the worst financial moves you can make – the loans are generally not dischargeable in bankruptcy, lenders have no incentive to work with you, and high interest and penalties that apply to private loans could leave you in unmanageable debt for decades. [Read More…]

Expansion of PAYE Income Based Repayment Rules Not Likely to have much Impact

PAYE rules expandedYou may have heard that on June 9, 2014, President Obama signed an executive order expanding the PAYE (Pay-As-You-Earn) program. According to the President, this action is intended to “make student debt more affordable and manageable to repay.” But will this executive order really have much impact?

The PAYE program is one of several income based repayment options available to student loan borrowers. It uses a formula whereby a student loan borrower can modify the repayment terms of his loan and pay back that loan using a payment that does not exceed 10% of the borrower’s discretionary income. After 20 years of payments, any remaining indebtedness will be forgiven.

Currently PAYE is only available to new borrowers – students who graduated prior to 2013 do not qualify. Older graduates have other loan modification options available like the income based repayment plan which is similar to PAYE but caps payments at 15% of discretionary income and forgives the balance after 25 years of payment.

Under Obama’s executive order, PAYE will be available to all student loan borrowers, not just members of the class of 2013 and future graduates. The new PAYE eligibility begins in December, 2015, so older graduates will have to wait at least a year and a half to take advantage of these new rules. [Read More…]

Tax Consequences of Student Loan Debt Forgiveness

student loan 1099Student loan debtors who qualify for debt reduction or debt cancellation may save thousands or tens of thousands of dollars.  Are there tax consequences to these savings?

As you may know, the IRS and many states characterize forgiven debts as taxable ordinary income.  Creditors will send you a 1099 representing the amount of debt forgiveness.

Fortunately, the Internal Revenue Code contains an insolvency exclusion to forgiveness of debt income.  If you (the debtor) are balance sheet insolvent both before and after the cancellation of debt, the ordinary income from the canceled debt is excluded from taxable income to the extent of the insolvency.

IRS publication 4681 gives several examples about how the insolvency exception applies and if you read this publication you will see that the concepts can be somewhat confusing because you must consider your insolvency both prior to and after the forgiveness as well as the amount of the forgiveness.

Here are my recommendations:

  1. if you are expecting to complete a debt reduction or cancellation in a calendar year, consult with a tax advisor (a CPA or enrolled agent) to discuss possible tax consequences.  If the potential debt forgiveness is especially large, it would be wise to talk to a tax advisor a year or two prior to the forgiveness year so you can engage in tax planning
  2. if you are considering filing for bankruptcy during the tax year in which your student loans are being forgiven, make sure to advise your bankruptcy lawyer about the pending forgiveness.  It may be beneficial to wait until the next calendar year to file bankruptcy so as to preserve your insolvency exception

Many of the high volume tax preparers who advertise on TV may not be knowledgeable about student loan debt forgiveness or the insolvency exception or about bankruptcy implications.  Make sure to raise this issue and do not hesitate to get a second opinion.