Work full time for a governmental agency or non-profit, and you can discharge your federal student loans after 10 years of payments.

Regardless of the balance.

Tax free.

And regardless of the job you hold in a qualifying employer.

Rich man, poor man,
Beggar man, thief.
Doctor, lawyer,
Indian chief !

Not sure about these job titles from the nursery rhyme, but the student loan forgiveness isn’t confined to the professionals at these agencies.

The IT person, the school janitor , the administrator and the bus driver are equally entitled to a public service loan forgiveness.

It’s easy to know if you work for a governmental agency of some kind, but drawing the line between non profits and 501(c)(3) entities may be harder.

The qualifying employers are those who can accept tax deductible contributions under the Internal Revenue Code.  Luckily, the IRS has a data base that will tell you if an entity is a qualified charity.

Employment doesn’t have to be continuous, either.

You needn’t sign up in advance.  All you need to do is make 120 payments and, as a practical matter, be on a payment plan longer than 10 years.  You apply for forgiveness after you’ve made 120 payments and while working for a qualifying employer.

Talk about poorly known treasures.

More on public service loan forgiveness.

This is just one of the incredibly useful nuggets about helping people with student loan troubles I gleaned from Josh Cohen, rightfully called The Student Loan Lawyer.

Image from Storytiming.com

The numbers on repayment of a student loan for four years at a private university are brutal.

No matter how enriching the education, the loan may be the financial death of the graduate.

But what sorrows me is the plight of the parents of those same students who have guaranteed or cosigned those loans.

Cosignor equally liable for loan

The co signor isn’t a second line of recovery that the lender can tap if the borrower doesn’t pay.  The lender can go directly to the co signor for payment.

More frightening, the cosignor has no control over whether the loan gets deferred (with interest during deferment added to principal) or whether the student honors the commitment to pay.

On the numbers in Gene Melchionne’s article , you can see in an instant why the student borrower might not be able to pay, even assuming the graduate got a decent job.   The payment on loans for a 4 year private college degree equal the average after tax income of  a new college graduate!

That’s right:  the student loan payment takes ALL of the typical grad’s after-tax income.

Default seems inevitable, and the parents who cosigned are on the hook.

Student loans in bankruptcy

The cosigned loan is a non dischargeable debt should the parents file bankruptcy, without taking any further steps.  To discharge a student loan, you have to file an adversary proceeding in the bankruptcy court and  prove to a judge at trial that repaying the loan as written is an undue hardship.

Historically, the test for undue hardship has been remarkably harsh.  Courts in the 9th Circuit have embraced a middle ground in a non dischargeability cases: partial discharge.

The court can find that repaying all of the loan is an undue hardship, but repaying some part of it is not.  The borrower or cosignor walks out of bankruptcy court with a smaller student loan burden.

I’m seeing a fair number of folks in their late 50’s and 60’s, nearing retirement, or enduring unemployment,with their kid’s student loans a millstone around their neck.

Frankly, I’m waiting for a stalwart couple of a certain age for an opportunity to argue to a bankruptcy judge that repayment of the offspring’s student loans at this point in the parents’ life is an undue hardship.

At least one prominent bankruptcy judge has made the case that the test for measuring undue hardship belongs to a long-gone era of student loans.

In Roth, Judge Pappas put out the argument that the Brunner test’s harshness could be understood when student loans could be discharged after a relatively short number of years.  Applied in today’s setting of perpetual indebtedness, the rule was an anachronism.

Let’s hope his view catches on.

Image courtesy of besighyawn.

Should you guarantee a student loan, asks my good friend Doug Jacobs.  His is the cool, reasoned analysis.  I want to jump up and down and say DON”T DO IT.

It pains me to say that.  My undergraduate education was funded in part with modest student loans.  I believe education is the key to much that is personally  positive and societally important. I applaud the public policy that is willing to make college more widely affordable.

Student loans have taken on a malevolent quality over the past years.  Loans are made apparently without any counseling about the consequences of getting a four year degree at an expensive private school in art history.  (That was one of my early cases:  $100,000 in loans for a skill set that allowed my client to earn $21,000 a year).    Since student loans aren’t dischargeable, they have the potential to blight the life of a student who borrows too much, never uses the skills acquired, or who finds the economics of the profession changed between school and career.

The new private student loans bear interest rates akin to credit cards, according to a recent story in the New York Times.  The Times  blog  rounded up more on student loans.

Then there’s the issue of timing:  parents guaranteeing the loans of their children face having student loans hanging over them as they approach retirement.  The student defers payment on the loan, keeping the parents exposed to the debt.  It entwines the two generations financially long after the student is an adult.  Retirement budgets seldom have available dollars to pay off student loans.

My advice is to approach parental guarantees of student loans with the same caution you use when confronted with a coiled rattlesnake.