- First, you're a 'delinquent'
- Next You Are 'In Default'
- What you can do
- The downside
- Worst Case Scenario
- The Bottom Line
If you don't pay your student loans, you probably won't find a team of armed U.S. Marshals at your doorstep, as one Texas man recently did. But it's still a very bad idea to ignore these debts.
In most cases, defaulting on a student loan has exactly the same consequences as defaulting on a credit card. But in one respect, it can be much worse. Most student loans are guaranteed by the federal government, and government officials have powers that debt brokers can only dream about. It probably won't be as bad as armed marshals at the door, but it could be very unpleasant.
Here's what happened.
First you are 'delinquent'
If your loan payment is 90 days past due, it's officially "delinquent". "This fact is reported to all three major credit reporting agencies. Your credit score will be reached.
This means new loan applications may be denied or only granted at the higher interest rates available to high-risk borrowers. A bad credit score can follow you in other ways. Potential employers often check applicants' credit scores and use them as a measure of your character. So do cell phone service providers who may deny you the service contract you want. Utility companies can demand a deposit from customers they don't think are creditworthy. A potential landlord might reject your application as well.
Next You're 'In Default'
If your payment is 270 days late, it is officially "in default". "The financial institution you owe the money to refers the problem to a collection agency. The agency will do its best to get you to repay, aside from actions prohibited by the Fair Debt Collection Practices Act. Debt collectors may also rely on fees to cover the cost of collecting money.
It may be years before the federal government gets involved, but when it does, its powers are significant. It can seize your tax refund and apply it to your outstanding debt. It can "garnish" your paycheck, which means it will contact your employer and send a portion of your pay directly to the government.
What you can do
These dire consequences can be avoided, but you must act before your loan is in default. Several federal programs are designed to help, and they are open to anyone who has federal student loans, such as Stafford or Grad Plus loans, though not to parents who have borrowed for their children.
- Three similar programs, called income-based repayment (IBR), pay as you earn (PAYE) and revised pay as you earn (REPAYE), reduce loan payments to affordable levels based on the applicant's income and family size.The government can even contribute a portion of the interest on the loan and forgive any remaining debt after you have made your payments over a period of years.
This last feature, by the way, is the origin of the nickname "Obama Student Loan Forgiveness Program. "The balance is forgiven, but not until after 20 to 25 years of payments have been made. And payments can be reduced to zero, but only if the person in debt has a very low income.
- The Public Service Loan Forgiveness Program is specifically for people who work in public service, either for the government or for a nonprofit organization. People who participate may be eligible after 10 years of work experience and 10 years of payments. (For more information, see Debt Forgiveness: How to default on your student loans. )
Details on these federal programs, as well as eligibility information, are available online.
It's important to remember that none of these programs are available to people whose student loans have gone into default.
A good first step is to contact your lender as soon as you notice you are having trouble keeping up with your payments. They may be able to work with you on a more profitable repayment plan or guide you to one of the federal programs.
The downside
There is one benefit to student debt, and it is this: If you keep up your payments, it will improve your credit score. According to Experian, consumers with student loan debt have, on average, a higher credit score than those who are debt-free. That solid credit history can be crucial for a young adult going for a first car loan or home mortgage.
Worst Case Scenario
About this man who found himself with armed U.S. Marshals on his doorstep: he borrowed the money 29 years ago and could not repay the loan. The government eventually sued. According to the U.S. Marshals Service, several attempts to support it with a court order failed. Contacted by phone in 2012, he refused to appear in court. A judge issued a warrant for his arrest this year, citing his refusal to appear. When the marshals finally confronted him outside his home, he told CNN, "I went inside to get my gun because I didn't know who these people were. "
And so you end up in front of an armed group of U.S. marshals, backed by the local police, for not paying a student loan of $ 1 500. (The man says he paid off the debt, didn't know about the warrant and doesn't remember making the call.
But even this sad story has a halfway happy ending. Eventually, he was taken to court and the man agreed to repay his old student loan of $200 per month plus accrued interest. After 29 years of interest, the $500 debt had grown to about $5,700.
The Bottom Line
The government and banks have a good reason to work with people who are having trouble paying off their student loans .. Student loan debt is at an all-time high, with an estimated 40 million people carrying an average balance of 29.000 dollars owed, reports the lending institution Experian.You can be sure that the banks and the government are as anxious to get the money as you are to pay it back.
Make sure you notify them as soon as you see potential problems ahead of you. Ignoring the problem will only make it worse.