Will unpaid student loans ruin your life?

Will unpaid student loans damage your credit score and ruin your life?

Let’s start by first stating that defaulting on any loan including a student loan can have serious negative consequences.

If you are able to recognize you have a problem in time then there are usually ways to repair the damage caused by defaulting on your student loan.

For the sake of argument let’s say you went to college to improve your life by getting a good education then walking away with a $85,000 debt from student loans.

Over the past ten years 2001 – 2011, college students have had many good reasons to borrow money for their college education and little reason not to. College costs exceeded inflation by as much as 7 percentage points in any given year.
The United States Congress raised the maximum on federal student loans and introduced a loan called the Grad Plus Loan which enabled graduate students to borrow money up to the cost of school attendance. Before 2008 which is when lenders started to tighten, lenders were handing out private student loans like was candy on Halloween.

The end result? Duh…. more and more college students borrowed more and more money. The average student debt at graduation was right around $27,000 in 2010, up 7% from 2009. This really understates the dramatically higher student debt that some college students racked up. Many of these college students got hit hard by their bills almost immediately after graduation. Of the 3.5 million federal loan borrowers who entered repayment mode in 2008 (as the United States economy) slid into a recession, 8% of these college students defaulted on their student loans within 12 months which is the highest percentage in more than ten years! This statistic does not take into account or include the thousands of borrowers who fell behind on the student loan payments without defaulting, or those graduates who couldn’t keep up[ with their private student loan payments.

Missing just a few student loan payments is an invitation for harassing phone calls from creditors along with letters demanding repayment. Defaulting on a student loan has the real potential to destroy your future. Being on the dim side of a federal student loan debt means the feds can demand repayment in full, turn your case over to collection agencies, garnish your wages, take any state or federal refunds owed to you and even go after your retirement benefits when you are a senior citizen. We have seen people who defaulted on their student loans in the 1980’s and 1990’s who’s social security benefits were garnished by the federal government. Not to mention an unpaid student loan can carry years and years of fees, interest and collection costs. A $5,000 student loan that defaulted for 20 years is now an astonishing $75,000 or more.

The federal student loan program offers several plans that can get your finances back on track. With private loans you will have to negotiate with the lender. Regardless and either way you need to pay close attention and know what kind of student loan or loans you have, where they originated and who loaned you the money for them.

For federal loans, visit the National Student Loan Data System website and reach out and talk to them.

For private student loans, dig up your paperwork – loan agreements which will include the terms of your student loan and repayment options. Additionally step up and reach out and call your private lender and talk to them.

With federal student loans which are also known as Stafford Loans now part of the Federal Direct Loan system as well as the Grad Plus Loans. These federal loans do go into delinquency when your payment is anywhere from 21 to 300 days late. If you fall 60 days behind, the loan agency will report the delinquency to the three national credit bureaus also known as EQUIFAX, EXPERIAN and TRANSUNION and meanwhile the late fees and interest will compound and will multiple and your debt can really get out of control.

If none of the federal student loan repayment programs offer you a solution another alternative is to apply for what is called a deferment or forbearance.  A deferment or forbearance essentially lets you forgo monthly payments, usually for a year at a time, for up to three years. The feds pay your interest on subsidized Stafford loans but not on unsubsidized loans.

Accrued interest does get added to the principle of your student loan or loans. You do have a legal right to deferment if you meet certain criteria, including economic hardship or the status of as a half time student or being a member of the military serving “active duty”.

Forbearance gets you off the hook on your student loan payments for up to five years, in year-long increments.
Generally speaking, the lender will decide whether or not you qualify. Interest does accrue on all of your student loans, including subsidized Stafford student loans. Forbearance makes the best sense for the borrowers who are really experiencing a short term financial problem, not really for those with situations that are not likely to improve.
If you are facing long term financial problems then you are most likely better off with in an income based repayment plan, which can reduce your student loan payments to as low as zero and offer forgiveness after 25 years.

Defusing into Default.

If you neglect to make a payment on your student loan for more than 270 days, your student loan is technically in default. Now most lenders but not all wait 365 days before making your loan default status. This gives you a window to redeem yourself and start making payments. Now if you are really stuck in a financial bind then you really need to step up and reach out and call your lender immediately to discuss your financial problems and student loan repayment options. Under no circumstances are you to just ignore your debt. After your loan defaults you will lose access to forbearance and deferment, as well to future financial aid should you want to pursue your education even move. Did we mention this defaulted loan will go on your credit report and will tarnish your credit score and credit report?

Good ole Uncle Sam does give you several ways to get back on track. One way is to rehabilitate the loan, in which you contact your lender and arrange to make nine timely, “reasonable and affordable” payments over a period of 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 common everyday practice negotiating the amount with the lender can really be a huge problem according to the fair credit lawyers – attorneys we spoke to in Philadelphia Pennsylvania that specialize in this particular field of law.
If you and your lender can’t come to terms then contact the Federal Student Aid Ombudsman and ask for help.

Another strategy is to consolidate your student loans with the Federal Direct Loan program, which lets you enter into one of the income based repayments almost immediately. On the other hand if you have already consolidated your student loans in the Direct Loan program, you generally are not eligible to do so a second time. The advantage of student loan consolidation is that it is faster. You don’t have to make nine payments first, says another law firm that specializes in Fair Credit Laws located in Narberth Pennsylvania which is located right outside of Philadelphia Pennsylvania. The fair credit attorney we spoke to did state to us that the default remains on your credit record – report for up to seven years.

You may now conclude that your student debt is now impossible to repay and make an attempt to file for bankruptcy but not so fast, according to another Fair Credit and debt lawyer in Philadelphia Pennsylvania that specialized in Credit Laws. You cannot simple file for bankruptcy and erase your student loan debt like you generally can with a conventional loan.
Under a few special and rare circumstances, such as death or permanent disability, or if the college closed while you were enrolled, your federal student loans are eligible for cancellation. In order to be relieved from your debt due to these examples of special circumstances you first must hire an attorney that practices law in Federal Court which is located in Philadelphia Pennsylvania and doing so is not cheap and then you will have the opportunity to ask a federal judge to dismiss your student loans and we will remind you this is not cheap or easy to attempt. For more details you can contact the Student Loan Borrower Assistance website.

Help with private student loans is an entirely different process in itself.
Private student loan lenders consider you to be in default as soon as you pass by the due date of your payments and you can count on your debt being turned over to a collection agency and phone calls and letters will follow demanding you take action and repay your student debts.  To avoid this from occurring, some but not all lenders will allow you to make lower payments for a few years and catch up on your student debt later in the future. These private lenders may also grant and allow you forbearance, for three months at a time, during which interest continues to accrue and is added to the principle of your student loan. But do not expect these private lenders to bend over backwards and go out of their way to extend these special deals.

Now unlike the federal government, which has the authority to garnish your wages and pursue your student debt indefinitely, lenders of private student loans must sue you to collect on a defaulted student loan, and they are subject to your state’s statute of limitations which is usually six years. Private lenders often can and will take borrowers to court.
If the private lender does sue you and win you can count on a court to garnish your wages, put a lien on any property you may own including you own home, and even put a court ordered freeze on your bank accounts. As with federal student loans, private loans are extremely difficult to simply discharge in bankruptcy court and require that you meet the same stringent standards.

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