Student loans can be separated into two broad categories: public (or federal) student loans, and private student loans.
Our recent article Determining if a student loan is public or private explains how to tell the difference, and what they mean in terms of filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.
This article is about what you can do with them once you are out of school and working on repaying them, and so does not address:
- Taking out student loans
- How to qualify for them
- The limits on them
Who guarantees public student loans?
The federal government guarantees public student loans, and since 2010 has the federal government issued all.
Prior to 2010 these loans were issued by private companies under the FFEL (Federal Family Education Loan) act.
Since 2010, this process has ceased and all loans are issued directly by the Department of Education.
These are now called Direct Loans.
The fact that the Department of Education now issues these loans makes it much easier to know that they are public.
Public loans also include PLUS loans, but these have somewhat different rules for repayment.
What are subsidized and unsubsidized public student loans?
Public student loans include Stafford loans, and can be either subsidized or unsubsidized.
- Subsidized means that the government pays the interest on the loans while the student is in college
- Unsubsidized loans accrue interest while the student is in school
Private student loans almost always accrue interest while the student is in school, and some even require monthly payments during this time.
What is THE BIG BENEFIT OF PUBLIC LOANS?
Public or federal student loans have much more lenient repayment programs.
The most important of these programs are Income-Based Repayment (IBR), and Pay as You Earn (PAYE).
- Keep a borrower out of default with minimal payments
- Mean the government will forgive the unpaid portion of the loans if you stick with them long enough
Private student loans do not have these options.
What are TYPICAL TERMS OF PUBLIC STUDENT LOANS?
If you’re not sure about some of the language used when discussing student loans, and what the words really mean, then this section should help you.
- The interest rate is set by congress for these loans
This can result in sudden changes in how much you have to pay. For example, when congress raises interest rates. (Source, U.S. News & World Report).
- The term of a loan is how long it takes to repay the loan, by default, public student loans have a 10-year term
If you sign up for Income-based repayment or Pay as You Earn, the term can be longer.
- Unlike most loans, a default on a student loan doesn’t occur until the debtor has missed 3 or more payments
With a typical loan, the loan is in default as soon as one payment is late.
Federal student loans have two options for getting out of default:
Collection and rights upon default
Public student loans have more power to collect than private loans.
- They can garnish 15% of a debtor’s wages without getting a judgment, and they can also take tax refunds
- Public student loans, like private ones report to the credit bureaus
Because these loans are often transferred amongst guarantee agencies, it can be hard to track them through a credit report.
Dischargeability in bankruptcy
- Public student loans, like private ones are generally not dischargeable in Chapter 7 bankruptcy or Chapter 13 bankruptcy
If the debtor can show that repaying the loans will be an undue hardship to the debtor and the debtor’s dependents, then a court will discharge them.
This is a very difficult burden and only a few borrowers succeed per year. This article has some stories of people who have succeeded.
If you’ve got a public student loan and are struggling to pay it back, then we might be able to help you.
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