If you fail to pay your student loans, you most likely won’t find armed federal agents at your door, but it is a very bad idea to ignore this debt. Student loans don’t just go away and there are severe consequences for making little or no attempt to pay them back. Turning a blind eye will trash your credit rating making it difficult (if not impossible) to rent an apartment, buy a car or home, use a credit card or attain any form a financial stability.
If you default on your federal student loans, meaning you missed nine consecutive monthly payments, the federal government can come after you in four different ways. If you are a W-2 earner, they can take your wages with only a 30-day notice. If you are not a wage earner, the government can garnish your social security money. If you’ve defaulted on your federal loan, the government can use the tax refund you may be waiting for. If none of the above applies, the government’s last option for collecting on a student loan is to sue you.
If you default on a private loan, the only option is for the lender to sue you. That’s why it is best to notify the lender by telephone then by letter to demonstrate a good faith attempt to pay. Private lenders don’t advertise options, but if you show good faith they may offer alternative payment plans.
But what if you can’t afford to pay? Here are three non bankruptcy options to address federally guaranteed student loans.
- Forbearance. If you can’t make your scheduled payments, your loan servicer may be able to grant you forbearance which could allow you to reduce or even stop making payments for up to 12 months. Interest will continue to accrue, but this gives you so time.
- Medical Discharge. A total and permanent disability discharge relieves you from having to pay certain federally-backed student loans. If you think you qualify, there are necessary documents you must provide to prove your disability.
- Various Income Contingency Programs. Income Driven Repayment (IDR) plans allow borrowers to pay a percentage of their discretionary income toward student loan bills each month. If your discretionary income isn’t above a certain level, your payment will be zero until you start earning more income. If you earn at or below 150% of the poverty-line income, your payment will be $0.
The old adage, “Honesty is the best policy” comes into play with student loans. Whether it’s a federal loan or a private loan, discuss alternative payment options with the lender. It’s never a good idea to ignore a loan, but there are times when you can’t make payments. You may be able to negotiate a settlement, whittle down or even wipe out debt, but you don’t know unless you speak up. For more information about government-guaranteed loans and repayment plans, go to www.myfedloan.org or contact my office.