Buried By Student Loan Debt?
Over 37 million Americans owe student loan debt, a collective $1 trillion. Some individuals leave school with tens of thousands or even hundreds of thousands of dollars in student loan debt. When you owe that amount of money, it can be easy to feel overwhelmed or hopeless especially when you experience financial difficulties that make it impossible to repay your loans as agreed. In this basic guide, we will take a look at student loans and what strategies you can take to repay them or even discharge them in bankruptcy.
Why People Default
Let’s first take a look at the most common reasons that people default on their student loans.
- Earning too little money.
Some people take out large student loans in the hopes that a better education will help them earn more money. When they leave school and can only find a job paying too little to pay their expenses and their student loan debt, they stop making payments, hide from creditors, and give up any hopes of paying off their debt.
- Health crisis.
Some people begin repaying their student loans with no problem but suddenly they experience an illness that makes it impossible for them to work so they stop making student loan payments.
When you have a two-income household it’s a lot easier to repay student loans. But when people get divorced they may struggle to make the same payment amounts they made before. Overwhelmed by the situation, they just stop paying. People in this situation sometimes assume that a lender isn’t willing to negotiate or offer a lower monthly payment.
Probably the most common reason for student loan defaults is debtor ignorance about the repayment, deferment, and debt forgiveness options available to them. Many debtors default on their loan when they could have taken advantage of better options and avoided the consequences of default.
When debtors default on their student loans, there are many consequences that can impact their finances now and in the future. Let’s take a look at the most common and most dangerous consequences of student loan default.
- Entire loan balance becomes due.
Once you default on your student loan, the full amount becomes due immediately. This means that instead of having maybe 15 years to pay it off, you might have only a month or two before the long arm of loan creditors can begin aggressive collection actions against you.
- Garnishments and seizures.
Student loan creditors have incredible powers to quickly garnish your wages and seize money in your bank accounts. And once you default on your student loans, they may move as quickly as possible to grab as many of your assets as they can.
- Credit gets damaged.
A student loan default on your credit record is a huge red flag to future creditors, landlords, and even employers. Don’t underestimate the damage that a student loan default can do to your creditworthiness and overall trustworthiness. Bad credit can make it impossible to find good employment or even a decent place to live.
- Options close off.
What many people don’t understand is that defaulting closes the door on other options for handling student loan debt such as forbearance, deferment, and even the ability to choose your own repayment plan. Those options won’t reopen for you until you “cure the default,” we’ll talk about that later.
- Lose access to college transcripts.
Once you default on your student loans, you may no longer have access to your college transcripts. This is a serious problem for recent graduates who may be continuing their education or applying for opportunities that require school transcripts.
Student Loan Strategies
If you can’t afford to pay your student loans, there are some important strategies you should consider to avoid/cure a default, repay your loans, or have them forgiven.
- Don’t hide.
As soon as you realize you can no longer pay your student loans, contact your lender. Don’t hide and don’t avoid their attempts to contact you. Let them now in writing why you are struggling to pay the debt.
- Request forbearance or deferment.
Forbearance and deferment is an option that waives your requirement to repay a student loan for a limited amount of time. The biggest difference between the two options is that when you’re in deferment you don’t have to pay any interest on the loan but when you’re in forbearance you do have to pay interest.
- Choose a repayment plan.
It’s important to understand that you may have the option of choosing a $0 a month payment plan depending on your loan type and your financial circumstances. Here is a brief overview of the types of low-income repayment plans available on federally backed student loans:
- Income-driven repayment plans.
You repay your loan according to your income. If you earn under a certain amount, you may pay nothing each month until your finances improve. There are four types of income-driven repayment plans, contact your lender or an attorney for details.
- Public service loan forgiveness.
If you’re working for a non-profit or another qualifying public service job, you may receive a special repayment plan that forgives the balance of your student loan debt, tax-free after you’ve made 120 payments.
If you have private student loans, these income-driven repayment plans may not be available but lenders may still be willing to work with you.
Cure Loan Default
It’s important to remember that repayment options may not be available if you’re currently in default. To regain access to repayment plans and other options such as forbearance and deferment, you need to cure a default via loan rehabilitation. For federally backed student loans, the lender will offer you a short-term repayment plan based on your income. The repayment plan is designed to bring the loan out of default and to once again give you access to long-term repayment options, deferment, and forbearance.
If you have defaulted on a private student loan, you will need to negotiate with your lender as each creditor may have varied policies. Talk to an attorney who can help you with this process.
As you may have heard, it is difficult to discharge student loans in bankruptcy but it’s not impossible. You need to prove four things to receive a student loan debt discharge in bankruptcy:
- You made an honest attempt to repay the loans in the past.
- Repaying your student loans would create an undue hardship on you.
- That hardship is likely to last into the foreseen future.
- You would not be able to pay for the basics necessary in life (rent, food, medical care etc.) if you had to repay your student loans.
As simple as these standards seem, they are very difficult to meet. Even some people who are permanently disabled have not been able to discharge their student loans because they are unable to meet the standard for discharge. However, there are people who have discharged their student loans in bankruptcy. To find out if your situation merits a bankruptcy discharge, speak with a qualified and experienced attorney.
As you’re attempting to tackle your student loan debt, it’s important to remember that defaulting on your loan is a dangerous and unnecessary choice. There are many options available to avoid default even if you are extremely low-income and can make no payments.