More on the National Crisis of Defaulted Student Loans: the Income Based Repayment (IBR) Program is One Option to Avoid Wage Garnishment

The student loan debt predicament is to the 2010s what the foreclosure/subprime lending crisis was to the 2000s. Student loans are a massive consumer debt issue that reaches every economic earnings level, from the underemployed recent graduates unable to find a career in their chosen profession, to the experienced professionals earning a median income. Student loan debt service is simply expensive, even for the average employed professional. And little relief is currently available from the federal government or otherwise.

(Read more of my continuing student loan debt blog: The Student Loan “Debt Bomb”: With Student Loan Debt Out of Control, What Can Bankruptcy (and Congress) Do to Help?)

According to Forbes.com in late 2014, the total student debt load in the U.S. is over $1 trillion dollars, a number which comparatively represents about 10% of the amount of outstanding mortgage debt in America. As of early 2015, the interest rate on Stafford is presently 4.66% for undergraduate loans and 6.21% for graduate loans.

As a practical example, a recent graduate from a 4-year public university with an average student loan debt of $30,000 will repay their student loans at $272 per month for at least 10 years. Add a graduate degree to the calculation with the additional average debt of $57,600 and that monthly student debt expense jumps to $917 per month for ten years.

For the average single income earner in Minnesota with a graduate degree and carrying the national average student debt load, this means that approximately 28% of their take-home pay will be devoted each month to student loan debt service alone. Try affording a mortgage, credit card payment or child care with that much income devoted to student loan debt service.

The result is widespread student loan default. A defaulted student loan, like any other unpaid debt, can aggressively force repayment via wage garnishment of 15% of one’s take home income. When this happens, the defaulted borrower may not be able to afford their other basic living expenses such as housing, utility and food expenses. Thus the defaulted student loan can snowball into a series of unfortunate events including accumulation of credit card debt used to purchase such basic expenses, to eviction, foreclosure and even bankruptcy. And while bankruptcy usually provides relief from other debts, it will not discharge student loan obligations so that the crisis continues during and after a bankruptcy is filed. All the while, interest continues to accumulate on both the unpaid balance and the unpaid interest—resulting in reverse amortization that can easily double the balance due in a matter of several years. (Forbearance or an allowed temporary suspension of payments may also result in reverse amortization of the loan balance, and often this option is best avoided for this reason.)

One of the few forms of relief available for student loans is the federal Income-Based Repayment program, also called the “IBR” program. Under the IBR program, student loan repayments are capped at 15% of one’s discretionary income. Discretionary income is calculated as the difference between one’s most recent adjusted gross income (AGI on the last federal tax return Form 1040), less 150% of the applicable poverty line for your state and family size. Additionally, you must be able to demonstrate a financial hardship and meet other personal and loan eligibility requirements. Parents PLUS loans are almost never eligible for the IBR program however most other federal student loans will qualify.

For more information on the federal Income-Based Repayment program, see the IBR page of the Federal Student Aid website operated by the U.S. Department of Education.

For assistance with applying for the IBR program and other debt resolution, contact Wartchow Law Office for a free consultation to discuss your options.

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