There are two types of student loans – federal or private. The one most important thing that the two have in common is both are non-dischargeable in bankruptcy, unless upon proof of the most exceptional circumstances, the borrower is able to convince the court that repayment of the loan would be unduly financially burdensome.

Federal loans are issued and underwritten by the federal government through the U.S. Department of Education. Private student loans are issued by banks such as Wells Fargo, Discover, PNC, and others. Borrowing from a private bank is much like borrowing to buy a car, or a home but with again, the important distinction being that student loans cannot be eliminated in bankruptcy like a car or home loan.

Previously, private student loans were dischargeable in bankruptcy. That changed in 2005 with Congressional passage of the Bankruptcy Reform Act. Since 2005, a student loan borrower can either repay her or his loan, or the loan can be a burden upon them for many years. The problem of student loan debt is growing each year. Currently, the amount of student loans outstanding is $1.2 trillion. By 2025, the total of outstanding student loans is projected at $2.0 trillion.

Beginning in July, 2015, the interest rate on Stafford loans, the most popular of federal loans will increase to 4.66% for undergraduate studies. The interest rate for student loans is tied to sale of the U.S. 10-year treasury note, which is currently at 1.6%. Interest on student loans is 3 points higher than the treasury note. The interest rate on Stafford loans for graduate studies is increasing to 6.21%. Last year, the rate was 5.41%. For Plus loans for graduate students or for parents paying for their children’s undergraduate education, the rate is increasing to 7.21% over last year’s rate of 6.41%. Interest on private loans are established by the market and generally significantly higher than federal loans.

A federal student loan is subsidized or unsubsidized by the government. If subsidized, the government pays the interest while the loan is in deferment. If unsubsidized, interest accrues on the loan and is added to the principal balance (capitalized) annually. Ouch! You’re going to want to know what type of loans you have. What you don’t know can hurt you. Smith & Weer will help you with identifying the type of loans you have – federal or private, subsidized or unsubsidized.

The good news is that the White House, working with the Department of Education, has established repayment programs for federal loans that are based on the borrower’s income following graduation. When you haven’t obtained that high paying job with the degree you paid all that money for, these programs enable you to apply for a monthly repayment amount based upon your current income. If your income is minimal, your repayment amount can be as low as $-0-. This reduced amount is spread out over a longer repayment period and can be substantially less than the amount established by the standard 10-year repayment period. At the end of the repayment period you select, the loan is forgiven. Once you are approved for a reduced payment that you can afford each month, you enter into “repayment,” and your credit report will show you as being current.

Adjusting your repayment based on your current income is only available for federal loans. No such options exist for private loans. You’re at the bank’s mercy.

Need to know more? Contact us. Smith & Weer can help you apply for the repayment programs offered by the Department of Education. Repayment plans with more favorable terms exist for those working for not-for-profit organizations, teachers, and for those who served in the military. Loans can be forgiven if the borrower is permanently and totally disabled. In limited circumstances, we can help you with private student loans.

Take the first step by contacting Smith & Weer for help. You’ll want to take action before the loan goes into default. Once in default, your wages can be garnished, and your income tax refund or social security can be taken without the need of the government going to court. Once in default, there are only a limited number of ways to become current, again. Act now.