Student loan debt has become almost out of control as it now totals more than $1 trillion. This makes this debt larger than even America’s total credit card debt. Depending on which source you want to believe students recently graduated from college owing an average of either $24,000 or $33,000. It’s not uncommon for people in their 40s to still be paying on their student loans. And one recent study revealed that 6.8 million Americans have defaulted on their student loans to the tune of $14,103,000.
It’s easy to default
One of the underlying reasons why so many people have defaulted on their student loans is that it’s very easy to do this. You’re considered to be in default when you miss a payment by just one day. However, your student loan servicer probably won’t report you in default until 90 days after you first missed a payment and it likely will be nine months of no payments before you start hearing from a collector.
It can get ugly
Federal student debt collectors have an enormous amount of power. They are entitled by law to garnish your wages without taking you to court, seize your tax refunds or even take up to 15% of certain types of Social Security payments. Plus, unlike other types of debts, there is no time limit on student loan debts. Collectors could literally hound you forever.
They can be too aggressive
The National Consumer Law Center has said it feels the Department of Education is not doing what it should to crack down on debt collection agencies that are too aggressive about seeking payments. The problem is, of course, money. How much these collectors earn correlates strongly with the amount of money they are able to collect from people who have defaulted on their student loans. And here’s the important part, they don’t always tell people about the options that are available to them.
You could have your loan discharged
If you defaulted on one or more of your federal student loans and are being harassed, you still do have options although the debt collector may not make this clear to you. You could actually get your federal student loans canceled if you are totally disabled. It’s also possible to get them discharged or cancelled if …
- You withdrew from school, but the school didn’t pay a refund that it owed you or the U.S. Department of Education
- Your school falsely certified that you were eligible to receive a loan based on your ability to benefit from its training, and you did not meet the ability
- You were victimized by identity theft
- The school signed your name on an application or promissory note without your authorization or endorsed your loan check or signed your authorization for electronic funds transfer without your knowledge
- The school certified that you were eligible for the loan but because of a physical or mental condition, age, criminal record, or another reason you are excluded from employment in the job for which you were being trained
Assuming you can’t qualify for loan discharge, you could rehabilitate one or more of your federal student loans. However, this applies only to a direct loan or FFEL program loan The way this works is that both you and the Department of Education agree on a practical and affordable repayment program. Your loan will be rehabilitated after you’ve voluntarily made the agreed-upon payments on time and the loan has been purchased by a lender. Note: Outstanding collection costs may be added to the principal balance.
Once you have had your loan rehabilitated, it’s possible you can regain eligibility for the benefits that were available on your loan before you defaulted. This can include forbearance, deferment, a choice of repayment plans, and loan forgiveness. In addition, you will have removed:
- The default status that was reported to the national credit bureaus.
- The default status of your defaulted loan
- Any garnishment of your wages
- Any of your income tax refund that had been withheld by the Internal Revenue Service.
Another option if you’ve defaulted on a federal student loan is loan consolidation. This is where you pay off any outstanding balances you have on your federal loans and end up with a new one that will have a fixed interest rate. You could choose to include a defaulted federal student loan in the new loan but only after you’ve made arrangements with the Department of Education and have made several voluntary payments. This is usually at least three consecutive, voluntary and on-time payments before you are allowed to consolidate the defaulted loan into the new direct loan.
The types of loans that can be consolidated
Almost every type of federal loan can be consolidated but not private loans. Some of the more popular types of federal student loans eligible for consolidation include Direct Subsidized and Direct Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans, Direct PLUS Loans and Federal Perkins Loans.
Eligibility for a Direct Consolidation Loan
As you have read, almost every type of federal student loan can be consolidated. However, there are some eligibility requirements you should be aware of. As noted above, you must have at least one Direct or FFEL Program loan and it must be in a grace period or in repayment. You must make satisfactory repayment arrangements with your loan servicer on the defaulted loan before it can be consolidated. And you must agree to repay the new Direct Consolidation Loan under one of the following
- Income-based Repayment
- Pay As You Earn Repayment t
- Income-contingent Repayment
The interest rate on a Direct Consolidation Loan
These loans have a fixed interest rate. The way it is calculated is by using the weighted average of your existing loans rounded up to the nearest 1/8 of 1%. The easiest way to understand this without doing all the math is that the interest rate on your Direct Consolidation Loan will be higher than the loan with the lowest interest rate you are currently paying but lower than the loan with the highest interest rate.
The options for repaying a Direct Consolidation Loan
One of the best things about choosing to consolidate your federal student loans into a Direct Consolidation Loan is that it offers several options for repayment as indicated above. For example, you could choose Income-based Repayment where your monthly payments would be capped at 15% of your disposable income. Pay As You Earn Repayment was a hot topic recently when Pres. Obama signed an executive order making approximately 1.4 million more people eligible for this program. It’s even better than Income-based Repayment as if you qualify you would see your monthly payments capped at just 10% of your disposable income. How do you calculate disposable income? The short explanation is that it’s your adjusted gross income minus 150% of the federal poverty level times 10 percent.
If you are unable to qualify for either Pay As You Earn or Income-based Repayment there is Income-contingent Repayment. It’s designed for people with lower salaries such as those who work in public service. It helps by pegging monthly payments to your family size, income and the total amount of money you borrowed. Its monthly payment is adjusted annually based on changes in the size of your family and your annual income – just as are Income-based and Pay As View Earn Repayment.