The more I learn about student loans, the more I see them as a double-edged sword poised to either help you or beat you down. On the one hand, student loans can be an excellent tool for completing higher education to launch a career and expand your earning capacity. But they can also be a huge burden if you over-borrow money or can’t find a job when the bills come due.
The last thing you want to do is ignore your student loans or allow them to go into default. Once in default, the loans become due in full and will go to collection agencies which can be difficult to work with. At that point, you have far fewer options to repay your loans. Instead, payments can be taken from you through wage garnishment and intercepted tax refunds. Depending on your income, even your disability benefits can be garnished.
WHAT DOES DEFAULT MEAN?
Federal Student Loans: Default refers to the failure to pay student loans. If your loans are federal, the borrower is in default once he/she fails to make payments for 9 months.
Private Student Loans: Private student loans are borrowed through private lenders such as Wells Fargo or Citibank. If you have private student loans, the default period will be defined in your loan contract. But typically, the borrower does not have the luxury of missing 9 loan payments. Instead, you can be found in default as soon as you miss one. Be sure to review your loan contracts or promissory notes carefully to better understand your rights and responsibilities for your private loans.
COLLECTION TOOLS FOR FEDERAL STUDENT LOANS
No statute of limitations: Once in default there is no time limit or deadline the government must meet to collect student loans. This means if you fail to pay, the government can haunt you until the day you die to collect your student loans.
Wage garnishment: A total of 15% of disposable wages can be garnished. Disposable refers to the amount remaining after all required taxes are withheld. If you earn minimum wage or work part-time, you are entitled to protect at least $217.50 per week, or 30 times the minimum wage ($7.25 per hour). Any amount over $217.50 can be taken as long as it does not exceed 15%.
The borrower may be able to challenge the garnishment due to financial hardship or employment problems. Contact your lender/collection agency to explore this further.
Tax offsets: Generally, any tax refunds due to borrowers who are in default can be seized by the federal government. These offsets may also include special payments such as economic stimulus refunds and the Earned Income Tax Credit. There are defenses to tax offsets but they only apply in limited situations.
Benefit Offsets: To collect federal student loans, the government can also take certain Social Security benefits, certain benefits under the Black Lung Act, and some Railroad retirement benefits.
Notable exceptions: If you receive Supplemental Security Income (SSI), the government cannot take that money. Also, if you receive less than $9000 a year, or $750 a month, the government cannot take any of your benefits. If you earn more, the offset limit is 15% of the total benefit amount. For example, let’s say you receive $850 a month in Social Security or SSDI benefits. The government can take $100 a month as long as it leaves you the minimum benefit of $750 a month.
COLLECTION TOOLS FOR PRIVATE STUDENT LOANS
Although private lenders do not enjoy the sweeping powers of the federal government when it comes to collecting on student loans, their collection tools can be just as effective. Generally, private lenders can use the same tools that are used to collect other types of debts. These include using private collection agencies, reporting your default to all 3 credit reporting agencies, and suing you in court.
Restrictions to these tools include statutes of limitations which limit how long a borrower can be sued for loan default. Also, a borrower’s property or assets cannot be seized without a court order.
However, if you are sued and the lender is awarded a judgment, wages can be garnished (up to 25%) and money can be taken from your bank accounts. If you own other assets or property, they could be taken to repay your student loans.
HOW TO AVOID DEFAULT
Federal Student Loans: There are several steps you can take to avoid defaulting on your federal student loans.
- Visit National Student Loan Data System for Students to find out information about your federal loans (number of loans, types, balances, payment amounts, current status).
- If you have fallen behind on payments, call your lender/servicer to discuss your student loans. If your income is tight, ask for a forbearance which will give you some time to improve cash flow.
- Keep in mind that your default will be reported to the credit reporting agencies and you will be prohibited from taking out new federal loans or grants.
- Online resources include MyEdDebt which offers information to borrowers who are in default, and Student Loan Borrower Assistance which offers extensive information about federal loans, FAQs, repayment options, and many self-help packets.
Private Student Loans: If you have private student loans, you could try these ideas to work with your lender.
- If you are unsure if you have private loans, check the loan documents to see if there is a co-signer; if yes, they are likely private loans. If you don’t pay the loans, the lender will pursue the co-signer.
- Review your promissory notes or loan agreements for the terms and conditions of your student loans.
- You can also pull your credit report for free from AnnualCreditReport.com.Private student loans should be on these reports. Note: you might have to pull all 3 – Transunion, Experian, and Equifax.
- Statutes of limitations do apply to private student loans. The question becomes can the loan still be collected? If the statute of limitations is not addressed in the loan agreement, it will be determined by the state in which the borrower lives. If the loan is uncollectable, you could negotiate with your lender to settle the debt.
- Contact your lender to explore options for more affordable payments. However, be aware that payment options are limited and lenders often expect full payment as scheduled. But call to find out for sure!
- Otherwise, consider reducing monthly spending or boosting income to make your payments more affordable.
For more information, including how to deal with defaulted student loans, read “What you need to know about defaulted student loans” by Shannon Doyle.
LSS Financial Counseling may be able to help. Our Financial Counselors will empower you to take action to get back on track with your student loans. Call our toll-free number at 888-577-2227 to schedule an appointment or get started online by clicking below:
Author Barbara Miller with LSS is a Certified Financial Counselor who specializes in Bankruptcy Counseling/Education and is a member of our Student Loan Team.