Almost all of us have ghosts that continue to haunt us. For some of us it might be the ghost of an old relationship while for others it might be the ghost of a failed business or the ghost of those stocks you should have sold before they crashed. Whichever the case it may feel as if that ghost will never stop haunting you. Unfortunately, student loan debt is just like your ghost. It can and will haunt you forever.
There’s just no escaping it
You’ve probably heard that old saying that there are only two sure things in life – death and taxes. Well, you could actually add a third to that – federal student loan debts.
The fact is that there is basically no way to escape federal student loan debts. It’s not even possible to get these debts discharged in a chapter 7 bankruptcy unless you can prove a serious financial hardship and have a sympathetic bankruptcy judge. Why can’t you discharge these debts in a bankruptcy? It’s because Congress changed the law several years ago to protect us taxpayers whose money fund these loans. People have even fled the US to escape their student loans only to find they were arrested when they tried to return to America.
The government has more powers than a rabid collection agency
If you owe on student loans you can literally be pursued to your grave. This is because there is no statute of limitations on collection activities as there are on most other unpaid debts. In addition, the federal government has powers that any private collection agency wishes they had. If you go into default on a student loan, the government can seize your tax refunds, garnish your wages without getting a court order or even take part of your Social Security checks.
Miss just one payment and you’re toast
It’s much easier to go into default on a government-backed loan than you might think. If you miss or are late on just one payment you are in default. However, your lender will probably not report you to the three credit bureaus until you are 90 days past due. If this happens your entire balance will be due immediately, collection fees can be added to your balance, you will lose your eligibility for any more federal loans and any unpaid fees or interest can be capitalized. If this happens they will be added to your outstanding balance and you’ll end up paying interest on them as well.
What happens to your credit report is really horrible
A default on a student loan can be one of the very worst things to appear on your credit report and can be worse even than late payments. If this happens…
- You may not be able to lease an apartment, buy a home or get any credit cards
- The interest on your existing loans or credit cards may increase
- You may not be able to open a checking account
- Your car and home insurance may cost more
- You may be denied a job
What to do, what to do?
If you have a student loan or loans that go into default there are three options. The first is to repay those loans. A second option is what’s called loan rehabilitation. You could do this if you have a Direct Loan or FFEL Program loan. What this requires is that you and the Department of Education must agree on an affordable and reasonable repayment plan. Your loan would then be rehabilitated after you have made the payments you agreed to on time and a lender has purchased one of your loans. If you choose this option, make sure you understand that outstanding collection costs could be added to your outstanding balance. If you are able to successfully rehabilitate your loan, you may regain those benefits you had before you defaulted. This could include forbearance, deferment, loan forgiveness and a choice of repayment plans. There are some other benefits of loan rehabilitation including:
- The default status on your defaulted loan will be removed
- Your new status will be reported to the national credit bureaus
- If your wages are being garnished, it will stop
- If any of your income tax refund is being withheld by the internal revenue service, you will receive it
The third option for dealing with student loans in default is to get a debt consolidation loan. This would allow you to combine all of your outstanding student loans into one new one with a single monthly payment and a fixed interest rate. However, you cannot include a defaulted federal student loan into the new loan until you’ve made arrangements with the Department of Education and a few voluntary payments. In most cases you will be required to make three consecutive, on time and voluntary payments before you can consolidate.
The repayment options
As noted above one of the options to get a loan or loans out of default is to repay them. When you graduated or left school you were automatically put into 10-Year Standard Repayment unless you were smart enough to choose another program. Assuming you didn’t, you have six other repayment options. One of the most popular of these is Pay As You Earn Repayment. You may have read about this recently when Pres. Obama issued an executive order that made about 1.4 million more Americans eligible for this program. What makes it so popular is that it caps your monthly payments at 10% of your disposable income that exceeds 150% of the federal guideline given the size of your family. Since this program is based on your income, it can change each year as your income increases or decreases. It also includes loan forgiveness, which means that if you make all of your monthly payments and on time for 20 years but still have a balance remaining, it will be forgiven or eliminated.
If you are not eligible
There are other income-based repayment programs. For example, if you are not eligible for Pay As You Earn, you could switch to Income-based Repayment that would cap your monthly payments at 15% of your discretionary income, which is defined as the amount that your adjusted gross income is above the poverty line. This repayment program is also based on the size of your family and can increase or decrease every year depending what happens to your income.
Another popular repayment program is called Graduated Repayment. This is where your payments start out low but then gradually increase every two years. This program can be especially helpful to young people who currently have low incomes but that will increase in the years ahead.