Bankruptcy and student loans
Higher education in the present day is highly unaffordable by the middle and lower sections of the people unless they make some arrangements like investing in 529 plans etc. Realising this hardship, the Federal Government has created the Federal Student Aid, which helps students to fulfil their dreams of higher education through Pell Grant and Stafford Loans. While the Pell Grant loans are disbursed to under graduates whose family income does not exceed $40,000 per annum, the Stafford Loans are disbursed in the form of subsidized and unsubsidized loans depending on the financial needs of the students. In the academic year of 2004-05, the Pell Grant has disbursed loans to the tune of $13 billion to five million students, while the Stafford has disbursed $41 billion.
Naturally, these disbursements are a burden on the exchequer and the Government is able to moot these monies only through the taxes which the federal citizens pay in different forms. If these money were not utilised for academic loans and were set aside for the betterment of the citizens, then may be, by now, the tax burden would have been somewhat reduced as the Government would already be plush with excess funds. On the other hand, if all the disbursed loans would have been repaid along with the interests committed by the students upon their graduation also, the same reduction in taxes would take place. But then, no such thing has occurred, thereby proving that the loans are disbursed according to the needs by the federal agencies, but are not repaid by the graduate students according to the due dates.
Statistics suggest that previously, some 30% of the students, who have been granted a federal aid for higher studies, would ignore repayment of the student loans for several reasons. While some reasons were genuine like undue hardship, physical inability etc. some reasons were only created for avoiding the repayment schedules. One such reason was Bankruptcy. Prior to 1998, students who received financial aid either from the federal or private lenders, would be discharged from the repayments only if they declare themselves to be bankrupt and the repayment instalment falls due within 7 years of their such declaration. As the federal loans are disbursed to lower-middle income groups, their equity in any assets would be very meagre or nil. Naturally, they hardly stand to lose anything by declaring themselves as bankrupt for the advantage of non-repayment of loans. As more than 1/4th population of the loan seekers started following this method, the Government realised that disbursing fresh loans for the next generations is posing a furthermore burden on the exchequer and the tax payer. So, on October 8, 1998, it came out with a ruling that students who receive financial aid for further studies Under Title IV, HEA student loans and grants, are not entitled to discharge their educational loans for non-repayment, even though they may declare themselves bankrupt. In other words, even if one declares himself to be bankrupt, he cannot get away without repaying his educational loans with exemptions only for death or physical disability that he cannot work any longer.
The maximum, the students can do is to consolidate their loans for interest reduction, work out ways of repayment schedules in consonance to their creditors and repay according to the commitment. If they happen to deviate from these schedules, the consequences may be very hard. First of all, they may have to face charges of default. A charge of default would be effective if no repayment is done, even after sustained reminders from the creditor, within 270 days in case of monthly instalments schedule or within 330 days for bi-monthly, quarterly, half-yearly instalment schedules etc.
A default may take any of the following recourse:
Future educational aid under Title IV of HEA may be diverted for loan recovery process.
No further loan reliefs or deferment advantages would be granted.
Default report of the concerned person, would be circulated to all national lending institutions, so that he may be denied of availing further facilities of acquiring assets or credit cards.
Creditor to the educational loans may demand an immediate repayment of the total outstanding amount.
Employer of the defaulter may be informed about the default and instructed to handover 15% of defaulters pay towards loan repayment.
The loan may be handed over to the collection agency and 25% of the outstanding balance is added as a collection fee.
Further, report of default stays on the credit report till the loan is repaid in full.
In this way, the Federal Government has tightened the norms so that graduate students do not escape from repayment schedules. This formulation has resulted positively that only 20% (down up to 10%) of the students receiving the financial grants are defaulting the loans. Even in this 20%, if we set aside 5% for reasons of death or physical inability, more 15% of the defaulters are to be tapped. If only they could be convinced of sticking to repayment commitments, then naturally, the Federal Government would not need the huge amounts which it draws from the tax payments. Instead, the loan amounts which are repaid can be further circulated and as such, the tax payers burden could be reduced a lot.
A reduction in taxes results in increasing consumer savings which in turn can be circulated for relaxing the credit crunch in the economy thereby resulting in entrepreneurial profits and more employment opportunities. In this way, sincerity on the side of students will result in their own benefit.
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