Tag Archives: student loans

Addressing Defaulted Student Loans

It is drilled into our minds from childhood that in order to have a decent future, we must obtain higher education.  What we aren’t told is what that education will end up costing us.  Like the housing boom of years past, we are seeing a large number of loans being handed out to millions of students with little regard as to whether those students will ever be able to pay back the money they’ve borrowed.  Similar to the housing boom, this trend, and the inevitable defaults that will follow are sure to lead to the collapse of the student loan market.  Unfortunately, unlike mortgages, student loan debt is entitled to serious government protection and in the vast majority of cases is not capable of being discharged through a bankruptcy.  So, what if you are one of the many individuals out there whose loans have gone into default status?

The ramifications of defaulting on your student loans can be significant.  First, once you’ve defaulted, this information will be reflected on your credit report and will have a negative impact on your credit score making it difficult to qualify for additional lending to purchase a vehicle, own a home, or continue your education or help finance a child’s education.  Additionally, after defaulting, you may be placed on the federal tax offset list, which means that instead of receiving your tax refund every year, those funds will be sent to your lender.  Finally, once you default, the government may be able to garnish your wages i.e. withhold a portion of your paycheck (up to 15% of your take-home pay) and apply it to your outstanding balance.  Now for the good news, there are things you can do to help you avoid these consequences.

If you have defaulted on a loan, you are ineligible for some programs that have been established to help people who cannot afford their payments i.e. forbearance and deferment; however, you may still have options.  One such option if you have sufficient income and are concerned with having the default removed from your credit report would be to have the loan rehabilitated.  You can request enrollment into a loan rehabilitation program by contacting your guarantor.  In order to rehabilitate your loans, your guarantor will require that you make between 9 and 12 on-time monthly payments.  Once the required payments have been made, your guarantor will send you a rehabilitation agreement for you to sign and return.  After you have returned the completed agreement, your grantor transfers the loan to a new lender and servicer and requests your previous loan holder and consumer reporting agencies to remove the default entry from your credit report.  The loan is then out of default, and your continue making on-time monthly payments to your new servicer.  Please note that it is important for you to stay on top of your payments once your loans have been rehabilitated because loans rehabilitated after August 14, 2008 are no longer eligible to be rehabilitated again in the event of another default.  But what if you can’t afford the requisite payments to get your loan rehabilitated?

For individuals with limited income who want to address their defaulted loans, you may want to try to have your loans consolidated.  Unlike rehabilitation, consolidation will no remove the default record from your credit report, but you also do not need to make up to 12 monthly payments to qualify.  Instead, to consolidate out of default, you must do one of the following: complete a satisfactory repayment arrangement with your current lender (make 3 consecutive payments) or agree to repay the consolidation loan under the income-based or income-contingent repayment plan.  Currently, the primary consolidation lender is the Direct Loan program, but you can consolidate with any lender offering consolidation loans.

It is important to note that loan rehabilitation and consolidation are remedies available for defaulted federal student loans.  If you have private student loans, you will need to contact your lender and see if you can negotiate terms that will allow you to get your loans out of default.  Additionally, there are pros and cons to each option.  For instance, with consolidation you may repay your loans for a longer period of time or accrue and pay greater interest over the long term.  Moreover, loan consolidations cannot be reversed; therefore, it is important that you carefully review your situation as well as the pros and cons of all possible remedies before entering into any program.

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The Cost of an Education

If you are like me, you probably have a decent amount of student loans that are now due or will be coming due shortly.  When I was growing up, I remember hearing about how I needed to get a good education if I wanted to get a well-paying job and make a decent living.  Coming from a lower-middle class family (and that’s probably being generous), I knew that the only way I could get that education and go on to live the American dream was to finance my education.  What I probably didn’t consider was how much that education was going to ultimately cost me.  Granted, I believe my education is valuable to an extent, but will it be worth the $130,000 I had to take out in student loans and will be paying on with interest over the next 25-30 years?  Only time will tell.  But what if it’s not?  That’s the question, I believe potential college students need to carefully consider before deciding to further their education.

Student loan lenders (unlike most other lenders short of government agencies) are given great protection by our government (don’t believe me see this article where a court determined that paying back loans were not an undue hardship for a blind diabetic who was making $811 a month in social security); therefore, if all that education fails to deliver on that promise of a bright future, there is little if anything you can do about it.  Let’s look at a comparison.  Five years ago you bought a $200,000 house.  Now, thanks to the decline in the housing market, that house is worth significantly less than what you currently owe on it.  For one reason or another, you are unable to make your current monthly payments, and you default on the loan.  Now late fees and attorney’s fees are adding on and that balance is getting larger by the minute.  Sounds like a pretty bad scenario, and it is, but the government offers the everyday Joe a way out of this mess.  Ultimately, if you end up with more house than you can afford, then you can allow the lender to foreclose on the property and file for bankruptcy to wipe out any deficiency that may remain after the sale of the property.  But what assistance is there if you get “more” education than you can afford?  In short, there isn’t any.  Unlike the liability on your home, car, credit cards, and medical bills, the liability on your student loans cannot be discharged in bankruptcy.  Not only that, but let’s say something unforeseeable happens, you become disabled, and can no longer work.  You are collecting disability which is probably significantly less than what you are used to living on.  You would probably expect sympathy and understanding.  What do you get?  You get your student loan lenders attaching your social security check and taking up to 15% of what little money you do have.  This is a remedy that is not afforded to any other lender.  So what makes student loans so special?  Can it really be that your education is more valuable than your house or car or health?  It seems illogical that we would not receive any protection against huge student loan bills particularly when you consider the fact that you got the education to make a better life for yourself and that education can’t even provide you with a job to cover the minimum payment on the money you borrowed to get it.

Now comes the small light at the end of the tunnel.  There are programs out there aimed to assist people with paying back their student loans.  One such program is the Income Based Repayment (IBR) option which determines the amount of your payment based off of your income.  IBR is intended to help you maintain a reasonable standard of living while allowing you to pay off your loans at an affordable rate.  The best part about the program; if you do not manage to pay off your loans in a 25 (I believe they may have reduced this to 20 for new grads) year period, then they are forgiven.  Additionally, in some extreme circumstances an argument can be made for an undue hardship discharge in bankruptcy that would allow your student loans to be discharged with the rest of your debt.  If you are having a difficult time meeting your student loan obligations, contact the Law Office of Suzanne Szymoniak today to discuss your potential options.

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