When was the last time you’ve been shopping and found a really great deal unexpectedly? How did that make you feel? What feeling comes to mind when you’ve gotten the inside track on information that only a few people have access to? Excited? Exclusive? In the know? It’s a great feeling, some people may even liken it to a drug. Today we’re going to share with you: 5 Secrets about Federal Student Loans, that every borrower in default should know.
Before the stone age, many Americans were struggling to pay their student loans. Unfortunately, the same will still hold true well after the coronavirus pandemic.” Simply put, the student loan debt crisis is dire, robbing borrowers of many opportunities (home ownership, employment, professional certificates, marriage, family planning, trips to Vegas, haircuts, hair extensions and the occasional spa/nail appointment). Yes, we know it’s true and so do you.
Have you ever wondered what your finances would look like IF you didn’t have student loans to repay? What if you had a benefactor who paid off your loans free and clear, thus releasing you from the burden and sleeplessness of thinking about your student loans? Where are they? At this moment, across the nation more than 1 million people default on their student loans every year.
If you are part of the 1 million and or know of someone (friend, co-worker, family member) who is currently behind on their student loan debt, this one’s for you. Before we let you in on the secrets we’ve uncovered, let’s take a school bus ride back to how student loans go into default status in the first place.
The first six months after you graduate from college, your student loans are in “deferment”. At this point, one of three things can happen:
#1. Repayment begins based on the terms of the loan agreement
#2. The borrower can request their student loans go into forbearance or deferment with their loan servicer
#3. Borrower does not begin repaying NOR do they request an additional deferment or forbearance on their loans
Student loans enter “default” status when the borrower fails to make payments for 9 consecutive months (270 days), without making arrangements with the loan servicer for a deferment or forbearance.
Interest continues to accrue, even on defaulted student loans. This also applies to loans that are in forbearance or deferment. This now turns the snowball of debt into an avalanche, as the borrower will have to pay up eventually. Is it naïve to say most borrowers have good intentions when it comes to paying back their student loans IF they could also cover their basic living expenses (such as their mortgage or rent, transportation, food, utilities and other responsibilities)?
Paying back student loans while trying to survive has resulted in many Americans having to make “life decisions” often at the expense of their credit score, future goals and dreams. For some, going to college and getting a higher education was the American dream, which has become a financial nightmare.
The harsh reality is, when you’re a freshman in college, where is the orientation video that told you the dark side of what happens if you can’t pay for your education after graduation? Where was the agent in the financial aid office who could have explained the cost of education and what a subsidized vs. unsubsidized student loan meant? Perhaps you wouldn’t have accepted the refund check year after year to spend on frivolous items that you can’t even recollect or recount?
If you have defaulted on your student loans, meaning you are 270 days past due or you are delinquent on your loans, below are 5 little known secrets about defaulting on your Federal student loans you ought to know:
Student Loan Secret #1: Your Credit Score is the First to Get the Hell Outta Dodge
5 Factors Make Up Your Credit Score:
Payment History – 35%
Utilization – 30%
Credit Age – 15%
New Mix – 10%
New Credit – 10%
With payment history accounting for the largest percentage of your credit score, when you miss a payment and are 30-days late (on a student loan or other bill), this knocks 90+ points off of your credit score. Imagine points being shaved off of your credit report every month you are late on your student loans.
It takes 9 months for a credit score to recover from a 90-day late on your credit report? It takes 3 years to recover from a 60 day late and 7 years on a 90-day late payment. It’s very hard to get a student loan discharged in bankruptcy. Your credit score takes a hit and your student loan keeps growing like a mushroom in your neighbors’ backyard.
Student Loan Secret #2: Professional Licenses Can Be Revoked for Defaulting
Depending on the state you live in, your professional license can be revoked if you are behind on your student loans. Individuals who are nurses, teachers, doctors, dentists and other professionals that require renewal of their board certifications are at risk of revocation. One thing to note is that if your license is revoked, this means you can’t work in your profession to generate income to repay your student loans, thus perpetuating the cycle of credit score impact and the loans remaining in default.
The great thing here is, if you know what options are available this will help you avoid the stress and frustration most people experience who have been in this situation. There are student loan repayment plans that you can qualify for:
A. Income Contingent Repayment (ICR) – This plan is intended for individuals who have jobs with low salaries. Payments are based on 20% of your Adjusted Gross Income (AGI)
B. Income Based Repayment (IBR) – Payments are based on your discretionary income and family size
C. Pay as You Earn (PayE) – Payments are based on 15% of your Adjusted Gross Income (AGI)
Student Loan Secret #3: The Bone “Collector” is a Real Thing
Well, maybe not the “bone collector”, however when student loans are in default they go into collections. I’ll let you decide which one is worse, the student loan collector or …. Now, there is no statute of limitations on student loan debt. This means the government can still collect and has collected from borrowers who have entered into their retirement years. Yes, someone’s grandma or grandpa out there is still paying back their student loans. That sucks.
When you think about a creditor attempting to collect on a bad debt, usually they will hire a collection company to do their bidding. The collection company will begin reaching out to the borrower to negotiate a payment on behalf of the creditor or take the borrower to court and get a summary judgement forcing them to pay.
In the case of Federal student loans, the government has multiple collection options to recoup their money from defaulted borrowers. Three of them are:
#1. Wage Garnishment – Wage garnishments allow the government to garnish your wages, a total of 15% of disposable pay without getting a judgement in court
#2. Tax Offset – Your income tax refund can be seized by the government if you are in default
#3. Federal Benefits Offset – The government can take your Social Security benefits to collect payments on defaulted student loans
Student Loan Secret #4: You Can Get of Default
Did you know you don’t have to stay in default forever? You don’t have to be saddled with getting your wages garnished, taxes offset or federal benefits taken away. As with everything, there’s a process for getting your student loans out of default:
Step #1: Contact your student loan servicer to find out which collection agency has your loans
Step #2: Rehabilitate your student loans to get them out of default
Note: It takes 9 “on-time” payments over a 10-month period to get student loans out of default
Student Loan Secret #5: You Can Only Rehabilitate Once
It’s like the shot clock winding down at a basketball game… You’ve only got one chance to get it right. As far as rehabilitating student loans are concerned. Once your student loans have been rehabilitated, they will be transferred out of collections back to a federal student loan servicer for regular payments to be made. Borrowers can ONLY get out of default once, unless they rehabilitated their loans prior to August 14, 2008. After that time, a one-time limit has been imposed.
Two things are for sure, yet one thing is certain: If you have student loans that are deferred, in forbearance or in default they will have to be paid at some point in time. The question is, at what expense has your student loans held you back? Has it been financially, has it impacted your goals of homeownership or something else? For some borrowers the answer is none and for others it could be all of the above.
Do you have questions about your student loans? Are you unsure if you are currently in default? Are you trying to figure out your options? We can help, schedule an appointment with us today.
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