Conquer Your Student Debt
- Wednesday, October 15, 2008
If you left college with a diploma and a pile of student loan debt, take heart. At least you have the degree. Millions of your fellow students owe huge sums for degrees they never received.
Whether or not you know the status of the loans you have, the lenders and the terms of repayment, one thing is certain: You owe the money, the debt will not go away, the lender will find you and the consequences for non-payment will be severe.
The good news is you can escape from student debt prison. But first you have to learn everything about the confusing world of student loans.
Know your student loan
Federal student loans. These loans are guaranteed by the federal government. That means the government will reimburse your lender if you default. But don’t think of default as an easy way out. If you default the government will come after you aggressively and will show no mercy. There are currently 15 different federal student loan programs and the plans are always changing. The most common are Stafford Loans and Perkins Loans.
Private student loans. These are loans made by banks and other financial institutions without government backing. If you default on a private loan, expect to hear from an aggressive guarantee agent.
Interest. Interest is the commission or “rent” you agreed to pay on the money you borrow. If you have a loan with an interest rate of say 8 percent, each year the holder of your loan adds 8 percent of your outstanding balance (principal) to the total amount you owe. If you are not paying at least the interest each month, your balance is getting larger. There is no limit to how big it can get. The method of adding interest can be confusing. If your loan says interest will be compounded daily, your loan holder will add 1/365 of 8 percent to the balance of your loan each day. If compounded monthly, the holder will add 1/12 of 8 percent at the start of every month. Interest that builds up over time is called accrued interest. All loans begin accruing interest the moment the loan is funded. Who pays that interest is the critical issue.
Subsidized. If your loan is subsidized, the government pays the interest while you are in school and during times of deferment. It is not simple to get a subsidized loan because these are need-based. Private loans are never subsidized by the government.
Unsubsidized. If your loan is unsubsidized, you must pay interest from the moment the loan is funded. But since the lender doesn’t require you to make payments while you are in school more than half-time, every month the interest is tacked onto the loan balance. The interest is capitalized. Even though you are not borrowing more money, the balance is growing because of the interest. Unsubsidized loans are not need-based.
How to track down your loans
Student loans are frequently passed from one financial institution to another without rhyme or reason. It’s quite easy to lose track of them if you’ve been in school or deferment for a long time. To find out about your loans even if you are in default, contact the Federal Student Aid Center, www.studentaid.ed.gov. (Or call 800 433- 3243.) Everything you need to know is available there. Another important contact is the Department of Education Debt Collection Services for Student Loans, 800 621-3115. If you have several loans you could have as many loan holders.
When you cannot pay
If you’re in over your head and can’t make payments, don’t panic, but also do not hide. It’s not the end of the world. You will survive, but you must act quickly to figure out your options. Visit the website and call the phone numbers of the offices mentioned above.
Loan cancellation. There are circumstances under which you might be able to cancel some or all of your student loans. Before you get too excited, it is not easy to qualify for cancellation. You may be able to cancel some or all of your student loans if:
1. You are dead. This may come as little consolation to you, but your heirs will want to know that your executor can request cancellation of all of your outstanding student loans upon your death. So can your parents who took a PLUS loan for you.
2. You become permanently and totally disabled after you got the loan—with no hope of ever recovering and a doctor’s signature to verify that.
3. The trade school you attended went belly-up before you could complete the program.
4. You serve the U.S. government wearing a uniform.
5. You are a teacher serving certain needy populations including low-income or disabled students.
6. You do not teach but serve certain needy populations in certain capacities and certain professions.
7. You perform community service in the Peace Corps, AmeriCorps, VISTA, ACTION or other volunteer positions.
8. You work in certain healthcare professions; you are a nurse or physician in your residency and or you agree to work in certain areas where healthcare workers are seriously needed.
9. You work in law enforcement.
To determine if you qualify for cancellation, call the Department of Education’s Debt Collection Services Office at 800 621-3115. They will send you a cancellation application and instructions on obtaining necessary documentation.
Deferment. This is an authorized temporary postponement of your loan payments. Conditions under which you might be granted a deferment:
1. You return to school at least half-time.
2. You are temporarily but totally disabled.
3. You are unemployed.
4. You are suffering economic hardship.
5. You are enrolled in a rehabilitation program for the disabled.
6. You are a parent with young children, have very low income or are on parental leave. Deferments are never automatic. You must apply for a deferment directly with the loan holder. Interest continues to accrue during deferment; however, if you are deferring a subsidized loan, the government pays the interest during deferment. To obtain a deferment contact your loan holder for an application. Complete it carefully and make sure you include all required documentation. You will have to prove your case. Follow up to make sure your request is processed correctly.
Forbearance. If you don’t qualify for deferment but are facing hard times, your loan holder may allow you to postpone payment or temporarily reduce your payments. This is called forbearance.
A forbearance is easier to obtain than a deferment. But forbearance is less attractive because interest will continue to accrue when you are not making payments, no matter what type of loan you have. Forbearance is attractive only because it will keep you out of default. The cost of default is much more expensive than the extra interest that accrues during forbearance.
Student loan consolidation
This is when a lender combines many loans into a single new loan, or refinances one loan with new terms. When you consolidate you extend your repayment period and lower your monthly payments. Consolidation increases the overall cost of the loan repayment and is rarely advisable.
Most student loans may be consolidated, but there are some restrictions. You won’t be able to consolidate your private loans into federal loan consolidation programs. A few private lenders have set up consolidation plans for private loans. You might consider consolidation if you are so deeply in debt you cannot keep up your monthly payments or you can afford larger payments and want to refinance at a lower interest rate under more aggressive payment terms.
You should not consolidate if you can find any possible way to abide by your current terms. Consolidation is expensive over the long-term. With most student loans, if you consolidate you lose the subsidized feature. Also, you may lose the cancellation option if you consolidate now but later find yourself eligible under one of the cancellation provisions above.
Consequences for not paying
If you have not paid for at least nine months and have not arranged for cancellation, deferment or forbearance, you are no doubt in default. If you do not reinstate your loans immediately this is what you can expect:
Dunning letters. If you have not already received collection letters it’s because they can’t find you or your roommates throw your mail away. Don’t get too comfortable. Your lender is using every legal means including skip tracing and contacting your past employers and your relatives. They are checking utility company records and the IRS to find you. It’s only a matter of time.
Reporting to credit bureaus. A bad credit report will negatively affect your ability to buy a house, get a job or even rent an apartment in the future.
Garnishment of tax refunds. The IRS and state tax boards can and will intercept your income tax refunds through the Department of Education’s tax offset program. This is the most common method of collecting defaulted student loans.
Garnishment of your wages. Unlike other creditors who must first sue you to garnish your wages, the Department of Education and guarantee agencies are authorized to garnish your wages without a judgment. And if you have not paid by the time you retire, the government will garnish your Social Security check. Try to explain that one to your kids.
A law suit. The Department of Education has forever to sue you because there is no statute of limitations. Once they have a judgment they will move aggressively to attach all bank accounts and liquidate your assets, including your home and personal property.
Student loans and bankruptcy
Many students consider filing for bankruptcy to get rid of their student loans. Unfortunately—and despite the cries of bankruptcy lawyers who promise to clear the slate of all your debts—this may be more fantasy than reality. Congress has all but eliminated student loans from being erased in bankruptcy.
If you need more information on how to select a payment plan, postpone payments, limit interest and fees, get out of default or specific details on loan cancellation, deferment or forbearance, read Surviving Your Student Loans by Nancy Mitchell (Book locker.com, $14.95). Hint: Get it from Amazon where it’s discounted. This book could save you thousands.
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