Dear Class of 2017, About Your Loans

From WiseBread New Graduate Help Center: Reyna Gobel, Student Loans Expert

 

Dear Not-Yet-In-Trouble Federal Student Loan Borrower,

You might have heard that the Department of Education will be sending out letters to millions of student loans borrowers. The letters target borrowers whose grace periods are ending, as well as borrowers who exhibit signs of trouble that could lead to defaulting on their loans. If you haven’t started repayment yet but are fretting about how you’re going to possibly repay all that money — stop worrying.

I’m writing you this letter to not only give you important details about student loan repayment, but also to help you be aware of potential issues well before trouble starts.

I Defaulted — Here’s How to Avoid My Mistakes

I defaulted on a federal student loan simply because I didn’t know it existed. I had over a dozen student loans from different lenders; I forgot about one loan and went into default. It’s easy to do, but it’s also easy to avoid. Just log in to the National Student Loan Data System. You’ll see all your federal student loans on this site, along with contact information. Either arrange to pay each individually, or consolidate them into one loan. This is also a great time to get a free credit report – it can alert you to any problems you might have, like having missed a loan or bill payment.

Then, know yourself. If you can’t keep track of each individual loan, you really need to consolidate them into one loan to streamline payments (ask your loan servicer about consolidation options). Once consolidated, you can still choose a plan where payments are based on income, such as Pay as You Earn. And if you’re interested in the public service loan forgiveness program, know that it’s only available through loans originated by or consolidated with Federal Direct Loans.

Realize That Even With the Pay as You Earn Plan, You Might Have Payment Problems

The income-based Pay as You Earn repayment plan bases payments on your income and family size, but it doesn’t fully consider your expenses if your circumstances change. For example, at some point, you may have to help support a sick parent or child. You could also have bought a home when your income was higher. After a pay cut, a majority of your income could go towards your mortgage.

If you experience a financial setback, you have three options:

• Call your servicer and see if your Pay as You Earn payment amount can be adjusted. You have to supply your income annually, and you may have forgotten to do so this year, causing your payments to set based a higher income level.
• Ask for a deferment or forbearance, which are temporary payment breaks. Taking a break should only be done if the situation isn’t permanent. Always take a deferment when possible over a forbearance when any of your student loans are subsidized. The government pays the interest on subsidized student loans during periods of deferment.
• If your income is lower because you took family leave for six months, you may not want to change your plan. However, for long-term pay cuts where your income-based repayment is too high for your budget, you should ask your servicer to also calculate payment options and see which payment option offers the lowest monthly payment.

Don’t Feel Embarrassed If You Don’t Know Something About Student Loans

I wrote two editions of a 240-page book on student loans, and I still don’t know everything about them. I read articles and play with the student loan repayment calculators every day. There’s always something new to learn. For instance, the public service loan forgiveness employer verification form wasn’t created until after the first edition was released. Now, thanks to that form, you can find out if you qualify for the public service loan forgiveness program right away and register for it right after you start working or after you’ve already started repayment — the choice is up to you. Never be afraid to ask your servicer questions about any of these programs.

Talk to Your Friends Who Are or Will Be in Repayment Soon

I’m not the only person who has experience with and advice about student loans. Talking to your friends can help you figure out repayment options and possibly pick better ones based on their choices and experiences. Just remember, they might have different circumstances than you, such as income level, children, or other debt that impacted their choices. Therefore, you shouldn’t copy their decisions. But you’ll be more informed and learn questions to ask your servicer. Plus, they may have missed payments, recovered, and now have advice about that. Learn from others’ student loan mistakes and victories.

The Most Important Part of This Letter?

The help you get doesn’t end here. You can tweet me anytime — @ReynaGobel— and ask questions. My articles will be posted here every week. You can ask me questions in my CollegeWeekLive web chats or get more helpful advice in my book CliffsNotes Graduation Debt.

Finally, remember you never want to receive a “dear troubled borrower” letter. The second you think you might miss a payment, talk to your loan servicer about options for a payment break or new repayment plan. With federal student loans, that one call will likely save your credit.

Reyna Gobel is a writer, author, public speaker, and student loans expert.  Her financial advice appears on Wise Bread’s New Graduates Help Center, in her video course How to Repay Federal Student Loans, in CollegeWeekLive newsletters and keynotes speeches, and in her audiobook How Smart Students Pay for School, now in its second edition. Be sure to check out her website for more helpful information on repaying your student loans.

Downside of Student Loan Default

Brandon Endsley, Financial Aid Administrator and Purdue Alumni
www.purdue.edu/mymoney

thinking man on debt

Before I discuss the downsides of student loan default, you probably need to know what the term student loan default means.  A student loan default occurs when a student accepts a loan to cover their higher education costs and fails to fulfill the payment obligations they agreed upon once the loan has entered repayment. If your loans enter default status do not feel embarrassed.  Many other student loan borrowers can relate to your situation.  According to the Federal Reserve Bank of New York in 2011, 27% of the 37 million student loan borrowers could not meet the repayment obligations and have defaulted on their student loans.  That means about 10 million Americans could not make their student loan payments.

Problems for the 10 million Americans in student loan default go above and beyond the ability to make payments.  There are 6 common consequences that can occur from a student loan being placed in default status.

1.)   A loan default in any category (mortgage, car, or credit card), would result in a negative effect on your credit score.

When entering into student loan default, all three credit reporting agencies are notified, causing your credit score to drop up to 150 points.    The maximum credit score is 850.  What is considered poor credit starts below 700 points.  If your credit score started at 850 points, a credit reduction of 150 points will have a negative effect on your ability to receive additional loans in the future.  A poor credit score can result in a denial of a future mortgage, car loan, or even the opportunity to obtain a credit card.  A loan default can also affect your ability to attend higher education institutions.

 2.) While your student loans are in default status, you cannot receive additional financial aid.

If you want to return to college and receive your associates, bachelors, masters, or even Ph.D., and your loans are in default, you will have to fund the complete cost of your education without federal aid.  This means, you will also not be eligible for federal, state, or institutional grants, scholarships, or loans, regardless of where you previously attended.

3.) The federal government can garnish your wages.

One avenue the government can use to receive payment on your defaulted loans is through wage garnishment.  Wage garnishment is where the federal government takes a percentage of your paycheck until the student loan debt has been paid off.  The federal government may take up to 15% of your wages, but the amount they take cannot exceed 30 times the federal minimum wage.

4.)  You will not receive a refund from your tax return until you are out of student loan default.

Along the same avenue, the federal government can also withhold tax refunds from the federal or state tax returns, and apply the funds to the overall student loan debt.  In addition to the garnishments listed above, the government can garnish federal benefits you receive to pay towards your debt.  An example of this would be, garnishing your Social Security Disability benefits (SSD).

5.)  You can be sued for debt owed.

Another way the government can receive funds owed is through the court system.  The federal government can sue for defaulted student loan debt.  Also, provisions for a statute of limitations do not exist. This means the federal government does not have a time frame limitation to sue and can bring a case against you to at any time.

The last two consequences include bankruptcy and additional fees.

6.) You cannot discharge your student loans in bankruptcy and you will be charged additional fees.

Bankruptcy is a reallocation of your assets to resolve your debt issues.  In previous years, student borrowers could include student loan debt in bankruptcy.  Now that policies have changed, student loan debt can only be included if approved by the court. 

Additional fees, charges, and collection cost involved in the defaulted student loan process mark the last consequences to consider.  Each debt retrieval avenue listed above costs either the federal government or collection agencies money.  The costs are then passed down to you, as the owner of the loan.  These fees will only increase the amount owed on the loan, and increase the repayment period.

Life happens, and situations can arise that make the repayment of a student loan difficult or even impossible.  Loss of a job, the inability to find employment after graduation, or just not earning enough money can all be reasons a loan may go into default.  The government understands these situations and has alternative repayment options for borrowers who fall into hard times.  Before your loans go into student loan default, be proactive. Call your lender and find out about the different options that may be available to you.  There are other options to help you through these tough times before causing further financial headaches.

Downside of Student Loan Default

Brandon Endsley, Financial Aid Administrator and Purdue Alumni
www.purdue.edu/mymoney

thinking about debt

Before I discuss the downsides of student loan default, you probably need to know what the term student loan default means.  A student loan default occurs when a student accepts a loan to cover their higher education costs and fails to fulfill the payment obligations they agreed upon once the loan has entered repayment. If your loans enter default status do not feel embarrassed.  Many other student loan borrowers can relate to your situation.  According to the Federal Reserve Bank of New York in 2011, 27% of the 37 million student loan borrowers could not meet the repayment obligations and have defaulted on their student loans.  That means approximately 10 million Americans could not make their student loan payments.

Problems for the 10 million Americans in student loan default go above and beyond the ability to make payments.  There are 6 common consequences that can occur from a student loan being placed in default status.

1.)   A loan default in any category (mortgage, car, or credit card), would result in a negative effect on your credit score.

When entering into student loan default, all three credit reporting agencies are notified, causing your credit score to drop up to 150 points.    The maximum credit score is 850.  What is considered poor credit starts below 700 points.  If your credit score started at 850 points, a credit reduction of 150 points will have a negative effect on your ability to receive additional loans in the future.  A poor credit score can result in a denial of a future mortgage, car loan, or even the opportunity to obtain a credit card.  A loan default can also affect your ability to attend higher education institutions.

 2.) While your student loans are in default status, you cannot receive additional financial aid.

If you want to return to college and receive your associates, bachelors, masters, or even Ph.D., and your loans are in default, you will have to fund the complete cost of your education without federal aid.  This means, you will also not be eligible for federal, state, or institutional grants, scholarships, or loans, regardless of where you previously attended.

3.) The federal government can garnish your wages.

One avenue the government can use to receive payment on your defaulted loans is through wage garnishment.  Wage garnishment is where the federal government takes a percentage of your paycheck until the student loan debt has been paid off.  The federal government may take up to 15% of your wages, but the amount they take cannot exceed 30 times the federal minimum wage.

4.)  You will not receive a refund from your tax return until you are out of student loan default.

Along the same avenue, the federal government can also withhold tax refunds from the federal or state tax returns, and apply the funds to the overall student loan debt.  In addition to the garnishments listed above, the government can garnish federal benefits you receive to pay towards your debt.  An example of this would be, garnishing your Social Security Disability benefits (SSD).

5.)  You can be sued for debt owed.

Another way the government can receive funds owed is through the court system.  The federal government can sue for defaulted student loan debt.  Also, provisions for a statute of limitations do not exist. This means the federal government does not have a time frame limitation to sue and can bring a case against you to at any time.

The last two consequences include bankruptcy and additional fees.

6.) You cannot discharge your student loans in bankruptcy and you will be charged additional fees.

Bankruptcy is a reallocation of your assets to resolve your debt issues.  In previous years, student borrowers could include student loan debt in bankruptcy.  Now that policies have changed, student loan debt can only be included if approved by the court. 

Additional fees, charges, and collection cost involved in the defaulted student loan process mark the last consequences to consider.  Each debt retrieval avenue listed above costs either the federal government or collection agencies money.  The costs are then passed down to you, as the owner of the loan.  These fees will only increase the amount owed on the loan, and increase the repayment period.

Life happens, and situations can arise that make the repayment of a student loan difficult or even impossible.  Loss of a job, the inability to find employment after graduation, or just not earning enough money can all be reasons a loan may go into default.  The government understands these situations and has alternative repayment options for borrowers who fall into hard times.  Before your loans go into student loan default, be proactive. Call your lender and find out about the different options that may be available to you.  There are other options to help you through these tough times before causing further financial headaches.