Imagine going to college to improve your life and walking away
with $500,000 in student debt. That number is no typo. A young
Seattle couple ended up so mired in debt on the way to their
degrees that they "couldn't even make the initial payments," says
Christina Henry, of Seattle Debt Law. After the collection agencies
started calling, the couple, who have two children and earn a total
of $80,000, visited Henry for help. "They took out as much as they
were able to and didn't even know how much they had. It's the most
egregious case I've ever seen."
Consider it a cautionary tale. Over the past decade, college
students have had every reason to borrow for college and little
reason not to. College costs exceeded inflation by as much as six
percentage points a year, bringing the average annual price of a
private-school education to $37,000. Congress raised the maximum on
federal student loans and introduced the Grad PLUS loan, allowing
graduate students to borrow up to the cost of attendance. And until
2008, when credit began tightening up, lenders handed out private
student loans as if they were party favors.
Result? More students borrowed, and in larger amounts. The
average debt at graduation was $24,000 in 2009, up 6% from the year
before, according to the Project on Student Debt. But that
understates the dramatically higher debt that some students racked
up. And many of them got swamped by their bills almost immediately.
Of the 3.4 million federal-loan borrowers who entered repayment in
2008 (as the economy slid into recession), 7% defaulted within the
year, the highest percentage in more than a decade (see the
explanation of late-payment penalties below). That statistic
doesn't include the thousands of borrowers who fell behind on their
payments without defaulting, or those who couldn't keep up with
their private student loans.
Missing a few payments invites dunning calls and letters, but
defaulting has the potential to destroy your future. Being on the
dark side of federal student debt means the feds can demand payment
in full, assign your case to a collection agency, garnish your
wages, pocket any state or federal refunds, and even come after
your benefits in your old age. "We see people who defaulted on
loans in the 1970s and 1980s whose Social Security benefits are
being garnished," says Paul Combe, of American Student Assistance,
an agency that guarantees federal loans. Worse yet, old, neglected
loans carry decades' worth of fees, interest and collection costs.
"A $2,000 loan that defaulted 20 years ago is now $30,000," says
Combe.
The federal loan program offers several plans that can get you
back on track. With private loans, you have to negotiate with the
lender. Either way, start by knowing what types of loans you have,
where they originated and who services each one. For federal loans,
go to the
National Student Loan
Data System
. For private loans, review your loan agreements, which should
include the terms of the loan and repayment options.
Help with federal loans. With the federal loans known as
Staffords (now part of the Federal Direct Loan program), as well as
Grad PLUS loans, the loan goes into
delinquency
when your payment is 21 to 30 days late. If you fall 60 days
behind, the loan agency will report the lapse to the national
credit bureaus. Meanwhile, late fees and interest will add up.
If none of the federal repayment programs offers a solution,
apply to your lender for
deferment
or
forbearance
. Deferment lets you forgo monthly payments, usually for a year at
a time, for up to three years. The feds pay the interest on
subsidized Staffords but not on unsubsidized loans.
Accrued interest gets tacked on to the principal. You have a
legal right to deferment if you meet certain criteria, including
economic hardship or status as a half-time student or you are on
active duty in the military.
Forbearance gets you off the hook on payments for up to five
years, in yearlong increments. Generally, the lender decides
whether you qualify. Interest accrues on all the loans, including
subsidized Staffords. Forbearance makes most sense for borrowers
who are experiencing a short-term financial crunch, not those whose
situation is unlikely to improve. Such borrowers are better off in
an income-based plan, which can reduce the payments to as low as
zero and offers forgiveness after 25 years.
Defusing default.
If you fail to make a payment for more than 270 days, your loan is
technically in
default,
but most lenders wait 360 days to make the default official, giving
you a window in which to redeem yourself. (If you're in that phase,
call your lender immediately to discuss your options.) After the
loan defaults, you lose access to forbearance and deferment, as
well as to future federal student aid, and the default goes on your
credit record.
Uncle Sam gives you several ways to get back in his good graces.
One is to
rehabilitate
the loan, in which you contact your lender and arrange to make nine
timely, "reasonable and affordable" payments over a ten-month
period. The Department of Education sets guidelines as to what
constitutes reasonable and affordable and stipulates that the
lender can't require a minimum payment. In practice, however,
negotiating the amount with the lender can be "a huge problem,"
says Deanne Loonin, of the National Consumer Law Center. If you and
the lender can't come to terms, contact the Federal Student Aid
Ombudsman, at 877-557-2575, and ask for help. If you rehabilitate
your loan, the default disappears from your record.
The other strategy is to
consolidate
your loans with the Federal Direct Loan program, which lets you
immediately enter one of the income-based repayment programs. (If
you have already consolidated your loans in the Direct Loan
program, you generally are not eligible to do so again.) "The
advantage of consolidation is that it's faster. You don't have to
make nine payments first," says Loonin. But the default remains on
your credit record for up to seven years.
You may conclude that your debt is simply insurmountable and
decide to try for bankruptcy. To succeed, you must demonstrate to
the court that your payments impose "undue hardship," with no
prospect of remedy, and that you made a good-faith effort to
repay.
In a few circumstances, such as death or permanent disability,
or if the school closed while you were enrolled, your federal loans
are eligible for cancellation. For details, go to
www.studentloanborrowerassistance.org
.
Help with private loans.
Lenders of private student loans typically consider you to be in
default as soon as you blow past the payment period, and you can
count on receiving collection calls shortly thereafter.
To avoid that scenario, some lenders allow you to make lower
payments for a few years and catch up later. They may also grant
you forbearance, for three months at a time, during which interest
continues to accrue. But don't expect them to go out of their way
to extend these deals, says Loonin. Check your promissory note. If
you don't see an alternative plan, call the lender and try to
arrange one.
Unlike the federal government, which can garnish your wages and
pursue the debt indefinitely, lenders of private loans must sue to
collect on a default, and they are subject to your state's statute
of limitations, usually six years. Lenders can and do take
borrowers to court, says Loonin. "We've seen more-aggressive
collection efforts, including more lawsuits, on the private-loan
side."
If they succeed, they can garnish your wages, put a lien on your
house and tap into your bank account. As with federal loans,
private loans are extremely difficult to discharge in bankruptcy
and require that you meet the same stringent standards. But a
lender might consider settling the debt when the prospects for full
payment are dim, says Henry. That was the case for her Seattle
clients. With no chance of repaying the entire amount, the couple
settled some of their private loans, arranged an income-based
repayment plan on the federal loans and hope to discharge the
remaining debt in bankruptcy.
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