How to put your financial life back together after student loan default
If you’ve defaulted on your student loans and are hiding from calls from debt collectors, your future doesn’t have to remain bleak.
True, being in default is not a good situation. Taking action to get student loan relief before slipping far behind on student loan payments would have been a much better route.
But if you are in default—meaning you’ve failed to pay your loans for 360 days—you do have options, and it’s worth it to try to remedy the situation.
Hiding isn’t going to work indefinitely, and even filing for bankruptcy offers only a slim chance of getting these loans off your back. Bankruptcy rules don’t allow people to get rid of their student loans unless there is an extreme hardship that won’t let up, such as a serious disability.
In a recent email, a desperate man with only a parttime job wrote me that he feared he’d ruined his life by defaulting on both private and federal student loans. While unable at this point to afford his loan payments, he hoped someday to be able to buy a home and wondered if the black mark on his credit record would make that impossible.
The answer: There is still time to fix this, and with the passage of time even a mortgage might be obtainable.
But here’s what a person would have to do first.
CLEAN UP THE FEDERAL MESS
You can’t hide from the federal government. Uncle
Sam can track you down through work and tax records and garnish your pay, which means taking money you’ve earned before you get a paycheck. The government also can keep any tax refund you’d normally have coming and dog you as you age by taking some of your Social Security.
To avoid this, the simplest approach would be to file to consolidate your federal college student loans, said attorney Emily White, of Columbus, Ohio. Typically, college students take out multiple federal Stafford loans, and consolidating means you bunch them all together into one loan that you repay over 10 or more years. Consolidating loans is a simple process you can do online through the official federal student aid site.
To make sure you don’t leave federal loans out of the process, use the National Student Loan Data System (https://www.nslds.ed.gov/nslds/nslds—SA/) to identify every loan you’ve taken out. If you miss some of your loans, consolidating won’t solve your problems.
As you consolidate your loans, be sure to ask for a payment plan that will reduce your payments to fit your income. This is called income-based repayment. A person with a part-time job, for example, may end up with tiny payments each month. Borrowers will no longer be considered in default once the loans have been consolidated, White said.
If you have already consolidated your loans in the past, and defaulted, you are probably going to have to follow another option. You will have to go through a process called rehabilitation.
You do this by contacting the servicer, the entity you probably see with an 800 number on your student loan bills. With paperwork in hand, you specifically ask the servicer to put you into the official rehabilitation process with payments that are based on your income. To find what is considered affordable for your income, try this calculator: https://studentloans.gov/myDirectLoan/ mobile/repayment/repaymentEstimator.action. Doing the calculation before calling your servicer will equip you to be an advocate for yourself. Sometimes servicers aren’t helpful, but you can hang up and try again.
Depending on your income, payments during rehabilitation can be as little as $5 a month. Make sure you get assigned payments you can afford, because if you start missing payments again without asking for a deferment, you won’t get a second chance at rehabilitation. The government can demand full payment of all you owe at once, said student loan expert Mark Kantrowitz of Cappex.com.
Once you enter rehabilitation, the government will stop garnishing your pay, and if you make nine out of 10 payments on time under the plan you negotiated with the lender, you will no longer be considered in default. You can make payments based on your income and your credit record will start to heal.
If borrowers continue to stay on top of monthly payments for seven years after consolidation or rehabilitation, they can clean up their credit record. Provided they have a solid job, they should be able to get a mortgage.
Keep in mind that the process of consolidating student loans, or working through rehabilitation, should be done on your own. There are numerous student loan debt relief companies that prey on desperate, confused people, charging borrowers a fee in the process. These services can’t arrange special deals that are beyond what individuals could request on their own when working through the consolidation process, said Joanna Darcus, attorney for the National Consumer Law Center.
TACKLING PRIVATE LOANS
There is no sympathetic Uncle Sam to help you out of your troubles with private loans.
Some private lenders might be willing to negotiate lower payments with you, but most don’t, and private loans can’t be consolidated or rehabilitated to bring them out of a default. But the lender also cannot garnish your pay or go after a tax refund or Social Security.
That doesn’t mean you are off the hook. In default, a private lender is likely to sue you to recover money. White said that to win a case a lender must provide paperwork that shows clearly the borrower’s history on the loan. In many cases the paperwork is sloppy and the borrower can win on that basis, she said.
This is when it may be worthwhile to get an attorney that specializes in student loans through www.naca.net, the site for consumer law attorneys. But White said that if the amount of money owed to a private lender is small, it may not be worth incurring attorney’s fees.
“There’s a difference between owing $6,000 and $100,000,” she said. Instead of fighting a suit, paying off the lender might be better.
Before going to great lengths to repay a student loan in default, be aware that each state has a statute of limitations on how long a lender can sue and recover what is owed, Darcus said, noting a person getting hounded from bill collectors might no longer have to pay and the bill collector could be bluffing. Yet, a person could accidentally start the clock back up again and inadvertently open the door to be sued simply by answering a bill collector’s phone call and acknowledging a loan, she said.