It’s scary to default on student loans. It sure was a lot easier taking the money, than it is paying it back. Because you’re under constant fire, and the pressure can be overwhelming, to put it mildly.
First, you’re not alone. You’re not a deadbeat, or a second class citizen. In 2016, according to a report from the Consumer Federation of America (CFA) there was a 14% increase in people defaulting on student loans since 2015.
It’s estimated more than 3,000 Americans default on student loans, every single day. According to Rohit Chopra, a senior fellow at CFA, and a former student loan ombudsman at the Consumer Financial Protection Bureau (CFPB).
The purpose of this article is to share exactly what your options are to deal with a defaulted student loan, how to go about getting things back on track, how to minimize the damage to your life, and fix your credit score.
What Is a Defaulted Student Loan?
Your student loan goes into default after 270 days of non payment. Prior to this, during the first 270 days, your student loan is only delinquent. The Federal Family Education Loan (FEEL) will go into default after 330 days, but all other loans are 270 days.
Repercussions of Student Loans In Default
Once your student loan is defaulted upon, you immediately are responsible for payment in full. You’ll also see your total balance, sky rocket, as a result of being charged a high interest rate, that accrues, and collection fees, and possibly additional fees.
You’ll have negative information reported on your credit reports, this will of course cause you to have a low credit score. You instantly lose eligibility for forbearance, deferment, and repayment plans.
Your defaulted student loan debt will be assigned to a collection agency. This is who royally screws you with fees. One of our members recently shared, on a $56,000 loan, he was immediately charged over $12,000 in interest fees, and instantly in excess of $13,000 in collection fees.
This raised his total balance to over $80,000. And the worst part is both these fees, interest and collection fees, and ongoing. As in they continue to increase. This is absurd, intimidating, and unsettling.
You also become eligible for what’s called a tax offset. This is where your state and federal tax returns are withheld or kept as payment toward your defaulted student loan debt.
You can also have your wages garnished, up to 15%, and this does require legal action. This results in your employer withholding money from your paycheck to pay off this debt.
You can also have liens placed against you and or your property. And if all else fails you can even be sued in a civil court, with the goal of getting a judgement against you.
All the while your balance continues to rise, faster than a speeding train, because it’s legal for you to be responsible for paying interest fees, collection fees, court costs, and attorney fees. And it’s legal for the interest and collection fees to accrue, and grow even faster.
These fees are suppose to be capped, and for some borrowers they may be. However many of our members, like the earlier gentleman, was assessed according to his claims, an illegal interest rate at over 22%. And the collection fees, were even higher. This means his balance is growing at over 40%, which is unheard of, unsustainable, and simply unreasonable.
Student Loans In Collections
It becomes very frightening when you start getting contacted by collection agencies for an astronomical total balance, that’s increased by 40%. This collection agency is also going to report negative information on your credit reports.
The collection agency’s primary goal is to pressure you. They want you to feel like you must pay them, and immediately. And should you choose too, there’s some important information to consider.
First, collection agencies are notorious for violating consumer rights. Every year, they’re sued by consumers, and by our government for violating consumer rights. Moreover, consumer’s have already won lawsuits fighting these unreasonable interest rates, and collection fees.
The takeaway if you’re going to pay off student loans in collections, it’s in your best interest to always negotiate to pay less. Yes, because it’s a federal student loan, you will potentially be responsible for payment legally, for the rest of your life.
Nevertheless, the collection agency is charging you all these excessive fees, because they anticipate settling your account for less. To clarify, they’ll happily accept payment for less than your total balance.
If you make payment, you need to ensure there will be an appropriate response by the collection agency. As in they’ll either stop reporting your account in default, delete the item entirely from your credit reports, or some action so you can improve your credit score, in exchange for your payment.
It’s important to note, while you may be legally responsible for payment, this negative information can only remain on your credit report for a maximum of seven years. Additionally you’re only legally responsible forever for repayment on defaulted federal student loans, not private.
If your student loans are private, they’re regulated by the statute of limitations. In other words, if you have a private defaulted student loan, you’re not responsible for payment forever.
Private student loans include Sallie Mae, private banks, etc. These are loans that had a higher interest rate, and we’re not issued or guaranteed by the government.
Federal student loans on the other hand are either issued directly by the government or guaranteed by the government. These include loans such as: the Perkins Loan, Direct Loans, Stafford Loans, etc.
For private student loans in default you’re only legally responsible for a specific number of years, from the date of last activity on your account. This does vary from state to state, so investigate your local listings.
It’s typically about seven years. Once this time period expires the debt is legally forgiven. And the item is suppose to be removed from your credit reports. You may still be contacted by collection agencies, but they can’t legally do anything.
They can’t sue you, nor report negative information on your credit report, regarding the account. It’s a piece of paper, that no longer has any legal bearing. And the appropriate response is to send the collection agency a cease and desist letter, so they’ll stop contacting you.
How To Get Student Loans Out Of Default
There’s four ways to get your student loan out of default. Only you know what the right choice is for your specific circumstances. And it’s important to make sure you’re in a sound financial footing, because many of these options you can only take advantage of once.
1. Student Loan Rehabilitation
With this option, you’ll need to make nine out of 10 on-time payments. You’ll have the ability to negotiate to lower your monthly payment, and many borrowers use the Income-Based Repayment formula. This is paying 15% of your discretionary income.
This option does carry additional costs. However it can get your student loans out of default, along with suspending any additional collection actions such as wage garnishment, tax offset, etc. This is a very common choice for borrowers.
2. Student Loan Consolidation
Just like if you were consolidating credit card debt, student loan consolidation is the exact same idea, and it can still be used even if you have only one federal loan. This option does have additional costs.
Please, be very careful about agreeing to repayment plans. Because we really want to avoid defaulting a second time, especially because you can only consolidate once.
3. Loan Cancellation
Yes, it’s possible to have your loan cancelled. However there are very limited reasons such as: disability, death, or a qualifying profession offering a Perkins Loan cancellation.
4. Pay Off Your Loan
The fourth and final option is pay off your defaulted student loan directly with the government. If you choose this option, you’ll have to pay the full balance.
How To Fix Your Credit
The worst part about defaulting on student loans is the damage it does to your credit score. This is because you’ll likely have multiple negative items on your credit reports, regarding this account.
This is because the original lender, reported a negative item, when you defaulted. Along with the collection agency your debt was assigned too, this is a double credit score whammy. Many folks have additional unrelated poor credit items, because they were in a tough financial spot, and student loans weren’t the only unpaid bills.
It’s okay, this is life and it is messy. You should know many unpaid collections are resold, time and again, with each agency having the ability to report additional negative items on your credit file. Most concerning is many employers now check applicants credit reports, prior to hiring them.
If you’re unfamiliar your FICO credit score is a lot like your Grade Point Average (GPA) in college. This defaulted student loan, collections, or any derogatory negative item on your credit report, is exactly like having an F on your transcript.
This one class, or one financial mistake, will make it virtually impossible to get a better credit score. Moreover the credit system is truly rigged against the consumer.
This is why our politicians have passed a multitude of alphabet soup laws from the Fair Credit Reporting Act (FCRA), to the Fair Debt Collection Practices Act (FDCPA), and so many more. Every last one of these laws is passed to protect you the consumer.
Regardless of how you choose to move forward with your defaulted student loan, it’s essential to clear credit report dings, blemishes, and derogatory items. This is the most effective way to repair your credit score.
We encourage our members to consider professional, legal, and affordable credit score help. There’s many good choices, but the best credit repair companies, will work with you to remove credit report dings, and deal with debt collectors.
The Credit Pros are one of the best. They’ve successfully helped their client’s remove every type of credit history blemish including: defaulted student loans, late payments, collections, charge offs, medical bills, liens, judgements, and many more.
You don’t have to live with a poor credit score for the maximum seven long, expensive, and embarrassing years. That’s the maximum, there is no minimum amount of time any item must remain on your credit reports.
Take action today and get a free credit consultation with a certified FICO professional by calling toll-free 1-877-418-7596. And for more tips, techniques, and strategies about how to improve your credit score with Dan Willis, sign up for our free newsletter and join our congregation.
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