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Private student loans can now be discharged in bankruptcy, but consider the alternatives first

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In July 2021, a federal court ruled that private student loans can be discharged in bankruptcy. But student loan refinancing may offer a better way to manage your college debt without significantly damaging your credit score. (iStock)

Bankruptcy is a legal proceeding that provides financial relief for consumers who cannot repay their debt. Many types of debts can be forgiven in bankruptcy, including credit card debt and medical debt. But certain types of educational benefits, such as federal student loans, cannot be discharged in bankruptcy.

In previous bankruptcy cases, it was unclear whether private student loans were dischargeable loans — until July 2021, when a federal court ruled that private student loans are not considered qualified higher education expenses under the U.S. Bankruptcy Code.

Discharging private loans in bankruptcy may provide much-needed respite for debtors who can’t meet their debt obligations, but bankruptcy has a lasting impact on an individual’s finances and credit score. It’s important to consider the alternatives before resorting to bankruptcy.

If you’re having trouble making your private student loan payment, then refinancing may be the answer. By refinancing your college debt to a lower rate, it may be possible to reduce your monthly payment so you can avoid defaulting on your loans.

Private student loan refinance rates are hovering near historic lows. To lock in your interest rate, get preapproved for student loan refinancing on Credible.

COLLEGE TUITION IS UP 33% SINCE 2000: HOW TO COPE WITH RISING COSTS

Private student loans can be forgiven in bankruptcy, federal court rules

The Bankruptcy Code prevents certain types of debt from being discharged in bankruptcy proceedings, including debt incurred as part of an “educational benefit.” But private student loans don’t fall into this category, according to a July 2020 court ruling.

A New York-based federal appeals bankruptcy court ruled in favor of a debtor whose private student loans issued by Navient were discharged in bankruptcy. The ruling further defines the meaning of an “educational benefit,” setting a precedent for private loan holders who want to discharge their student loan debt in the future.

For example, a “scholarship” for a student-athlete need not be repaid if the recipient remains on the team; similarly, a “stipend” is a payment that is conditioned on the recipient’s performance of services and generally need not be repaid. The defining characteristic of a loan, by contrast, is an unconditional obligation to pay it back.
“Educational benefit” is therefore best read to refer to conditional grant payments similar to scholarships and stipends. 

– July 2021 ruling from the United States Court of Appeals for the Second Circuit

But just because it may be legal to discharge these debts in bankruptcy doesn’t mean it’s advisable. You should weigh the implications of this drastic debt relief measure and consider the alternatives, like refinancing.

5 HIGHER EDUCATION EXPENSES YOU SHOULD BUDGET FOR

Private student loan refinancing may offer a more favorable alternative to bankruptcy

Chapter 7 bankruptcy, also known as liquidation bankruptcy, essentially allows you to have your private student loan debt forgiven, but it comes with a few major drawbacks:

  • You’re typically forced to liquidate luxury assets, such as a vacation home or second car, as well as financial assets like cash in savings, stocks or other investments.
  • Your credit score will take a major hit, which will make it harder to get approved for financial products with a low interest rate.
  • You may earn too much money to file for Chapter 7, depending on your household income and a bankruptcy means test.
  • You may have to hire a bankruptcy attorney, and attorney fees can add to the upfront cost of filing for bankruptcy.

Bankruptcy will remain on your credit report for 10 years, and it will have an immediate negative impact on your credit score. With bad credit, you’ll receive less favorable offers on financial products like mortgages, auto loans and credit cards — if you can qualify for them at all under these circumstances.

On the other hand, private student loan refinancing may offer a way to make your college debt more manageable without leaving a damaging mark on your credit history. Private student loan refinance rates are near historic lows, which means it may be possible for you to qualify for a better interest rate on your debt and lower your monthly payment. Under a more affordable repayment plan, you may be able to keep your finances afloat without defaulting on your loans.

You can browse your estimated interest rates without a hard credit inquiry on Credible to determine if refinancing can help you stay current on your private student loan debt.

STUDENT LOAN REFINANCING SAVES BORROWERS NEARLY $17K, THANKS TO HISTORICALLY LOW RATES

How to decide if student loan refi can help you prevent bankruptcy

It can be difficult to budget for private student loan payments, especially in times of financial hardship. Bankruptcy is one way to deal with unmanageable debt, but it’s not your only option. You may be able to cut your monthly payment by $250 or more by refinancing your private student loan debt to a longer repayment period, according to data from Credible.

It’s easy to see how much you can save on your monthly loan payment by refinancing. First, make sure you have private student loans, since refinancing federal student loans makes you ineligible for protections like undue hardship deferment and qualified education loan forgiveness. Then, follow these steps:

  1. Gather documents for your current student loans to find your interest rate and loan amount.
  2. Get prequalified to see your new estimated interest rate.
  3. Enter your loan information in a student loan calculator to determine your monthly payment.

Once you have an idea of your new monthly student loan payment, you can decide if the difference is substantial enough to keep you out of default.

You can compare estimated rates across multiple refinancing lenders at once on Credible without affecting your credit score, so you have nothing to lose. Make an informed decision about your current financial situation by exhausting all your options before considering bankruptcy.

STUDENT LOAN RATES SET NEW RECORD LOWS: HOW TO KNOW IF YOU SHOULD REFINANCE

Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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