15 Ways to Pay Off Defaulted Student Loan Debt

 

Student loan debt is one of the hardest debts to pay off. Many Americans pay on their student loans well into their adult life some adults continue to pay student loans well into their retirement years. If your student loans go into default, it can take a while to get them into good standing. 

You risk having your tax refund taken, your paycheck garnished or being taken to court. Federal student loans have more regulations and programs to help borrowers pay their student loan debt.  Private loans are not as regulated and offer very few programs or none at all depending on the company to help borrowers pay their student loan debt. Here are 15 ways to get current on defaulted student loans. 

Private loans

1. Offer a good faith payment or a lump sum payment to use as negotiation to request that any fees or finance charges be waived.  Also, request that your payment history is updated on your credit report. 
2. Refinance.  After paying your loan on time for at least two years you can comparison shop and sell the loan to another loan servicer or bank for a better interest rate.
3. When private loans go into default they are usually forwarded to a collection agency which may not be as willing to work with you to setup a payment plan.  Negotiate and offer a payment plan that you know you will be able to afford each month.  If they refuse to accept your payment plan you may have to provide documentation such as a budget or paystub to support your payment plan.
4. You may be charged fees by the collection agency but no more than 18.5% of the outstanding principal and interest.
5. If you are in the military and are on active duty there are limits on interest accrual.
6. If the collection agency is not adhering to the Fair Debt Collections Practices Act file a complaint against the company with the Federal Trade Commission.
7. You can consolidate loans to use the student loan forgiveness (or public service forgiveness) programs.
8. Ask for a copy of the collection agency's business license, proof that they have a legal right to collect on the student loan and proof that you owe the amount stated on the letter you received.
9. If the school you attended closed or you withdrew from school you may be eligible for a partial refund by completing an unpaid refund discharge application form.

Federal loans

1. After making payments on time for 9-10 months, your loan will be placed in good standing (rehabilitated) and you will be eligible for various programs such as deferment, forbearance and student loan forgiveness.
2. Determine how much you can afford to pay each month.  This may require that you create a budget and reduce some expenses to ensure you make the payments each month.
3. If your loan has not been sent to a collection agency, send a payment to the Department of Education's Payment Center. 
4. You can consolidate your loans into one loan which will put your loan in good standing.
5. Don't consolidate federal loans into private loans because you will no longer be eligible for deferment, cancellation, forbearance or income-based payment plans.
6. You can consolidate your federal loans into the Direct Loans government consolidation program.
7. If you default on a Direct Loan you must make 3 payments or agree to pay the loan using the Income Contingent Repayment Plan (ICRP) or Income Based Repayment Plan (IBR).  If you sign up for the ICRP or IBR you do not have to make 3 payments before applying for consolidation.
8. You can only consolidate a Direct Loan once.

Exercise Forgiveness Programs to Pay Off Your Student Loans

                                           

Fifty percent of Americans earns $50,000 or less and the dream of going to college has turned into a nightmare. The cost of college tuition increases higher than the yearly rate of inflation and less free money such as grants and scholarships are available for students wanting to go to college.  As a result, students are forced to obtain student loans. Student loans are merely another form of predatory lending and the economy is suffering from it. 

The default rate on most student loans is over 50% which affects college accreditations, affects the housing market - causes graduates who want to become homeowners to delay purchasing homes, prevents homeowners from upgrading to larger homes; causes couples to delay having children or achieving their financial goals; requires parents to provide financial support to children who move back home instead of focusing on planning for retirement and affects our reputation as a global economic leader.

One way to tackle student loan debt is to take advantage of student loan forgiveness programs. To be eligible for a student loan forgiveness program you must have made 120 separate monthly payments on time on Direct Loan Program loans.  Employees that work in the following industries are eligible: public health, public education, public library services and school library or other school-based services, emergency management, social work, military service, public safety, law enforcement, public interest law services, public library sciences, early childhood education, public service for individuals with disabilities and the elderly, employees who work for a not–for-profit tax-exempt 501(c)(3)organization or a private, not-for-profit organization.

The types of Loans eligible for student loan forgiveness are: Federal Direct Stafford/Ford Loans (Direct Subsidized Loans), Federal Direct Unsubsidized Stafford/Ford Loans (Direct Unsubsidized Loans), Federal Direct PLUS Loans (Direct PLUS Loans) for parents and graduate or professional students, Federal Direct Consolidation Loans (Direct Consolidation Loans). Here is a list of student loan forgiveness programs to help repay federal student loans:

1.      Volunteer in the ACTION program (including VISTA). Volunteers in Service to America call 1-800-942-2677 or 202-606-5000, americorps.gov/about/programs/vista.asp.

2.      AmeriCorps call 1-800-942-2677, americorps.gov.

3.      Peace Corps. Volunteers may apply for partial cancellation of Perkins Loans call 1-800-424-8580 or 202-692-1845, www.peacecorps.gov.

4.      Students who are in the Army National Guard may be eligible for their Student Loan Repayment Program, www.1800goguard.com/index_1024.asp.

5.      Full-time teachers in an elementary or secondary school that serves students from low-income families.  Contact your school district's administration to see which schools are eligible.

6.      Mississippi teachers who currently have their Alternate Route Teaching License and teach in a shortage area may be eligible for the Teacher Loan Repayment program www.ihl.state.ms.us or call 1-601-432-6997.

7.      The American Federation of Teachers maintains a list of other loan forgiveness programs for teachers, www.aft.org/yourwork/tools4teachers/fundingdatabase/.

8.      Employees who serve in the legal industry contact Equal Justice Works www.equaljusticeworks.org/ 202-466-3686, The American Bar Association (ABA) www.americanbar.org also has a summary of Loan Repayment Assistance Programs.

9.      Loan Repayment Assistance Programs (LRAPs) provide funds to make monthly payments.  Repayment and awarded benefits cannot exceed $10,000 in any calendar year or an aggregate total of $60,000 per attorney.  http://apps.americanbar.org/legalservices/probono/lawschools/pi_lrap.html

10.   US Department of Health and Human Services offers loan forgiveness programs through the National Health Service Corps, http://nhsc.bhpr.hrsa.gov/ and the Nursing Education Loan Repayment Program, http://bhpr.hrsa.gov/nursing/loanrepay.htm.

11.   National Institutes of Health's NIH Loan Repayment Programs www.lrp.nih.gov/ student loan debt for citizens who are conducting clinical medical research.

12.   US Department of Agriculture's Veterinary Medicine Loan Repayment Program (VMLRP) www.nifa.usda.gov/vmlrp offers loan forgiveness.

13.   California residents can contact the Office of Statewide Health Planning and Development www.oshpd.cahwnet.gov/ State Loan Repayment Program, 916-326-3745.  

14.   Contact the American Physical Therapy Association www.apta.org/ 1-800-999-2782 or the American Occupational Therapy Association www.aota.org/ 301-652-2682.

15.   Nicholas J. Pisacano MD Memorial Foundation Inc. (American Board of Family Practice) www.njpmf.org/

16.   Disadvantaged Health Professions Faculty Loan Repayment Program www.hrsa.gov/loanscholarships/repayment/faculty/

17.   Indian Health Service (IHS) Loan Repayment Program www.ihs.gov/loanrepayment/

18.   American Association of Medical Colleges (AAMC) maintains a database of state and other loan repayment programs for medical school students http://services.aamc.org/fed_loan_pub.

19.   Students who receive the Michael Murphy Loan to study law enforcement, law, probation and parole, penology, or other related fields are eligible to work as a State Trooper (or related law enforcement official) in Alaska. Contact the Alaska State Troopers, Director's Office Scholarship Fund, 907-269-5511 www.dps.state.ak.us/ast/.

20.   Maryland state and local government employees who earn less than $40,000 gross annually may be eligible for a loan assistance/repayment program to study law, nursing, physical and occupational therapy, social work and education. Contact the Maryland State Scholarship Administration, 410-974-2971 x146.

21.   US Department of Education Cancellation/Deferment Options for Teachers studentaid.ed.gov/PORTALSWebApp/students/english/teachercancel.jsp?tab=repaying and Cancellation for Childcare Providers,  studentaid.ed.gov/PORTALSWebApp/students/english/childcare.jsp?tab=repaying as well as the Teacher Loan Forgiveness Form www.ed.gov/offices/OSFAP/DCS/forms/form.teacher.loan.forgiveness.pdf.

22.   US Department of Education maintains a database of low-income schools eligible for teacher loan cancellation for Perkins and Stafford loans https://www.tcli.ed.gov/CBSWebApp/tcli/TCLIPubSchoolSearch.jsp.

23.   The Federal Student Loan Repayment Program www.opm.gov/oca/pay/studentloan/ allows federal agencies to make payments directly to the student loan holder.

24.   Student Loans can be discharged or canceled http://studentaid.ed.gov/repay-loans/forgiveness-cancellation

25.   Your federal student loans may be included when filing for bankruptcy http://studentaid.ed.gov/repay-loans/forgiveness-cancellation, www.studentloanborrowerassistance.org/bankruptcy/  

How Student Loan Changes Will Affect You

President Obama asked Congress to extend low student loan interest rates for another year. If Congress cannot come to an agreement and pass the bill, student loan interest rates for subsidized government Stafford loans will double increasing from 3.4 to 6.8% on July 1, 2012. However, the increase will only affect undergraduate students who are issued government loans after July 1, 2012.  Interest rates for existing loans will not be affected.  

The interest rate for subsidized loans which are based on economic need is fixed for the life of the loan.  You are not charged interest while you’re in school at least half-time and during grace periods and deferment.  However, a six-month grace period on interest charged on federal subsidized student loans has been suspended which will cause interest to accrue the day after a student graduates from college from July 1, 2012 through June 30, 2014. 

The interest rate for subsidized loans is fixed at 6.8% for graduate and professional degree students and will not be affected.  The interest rate for unsubsidized student loans is 6.8% and will not be affected.  Interest accrues on unsubsidized loans from the time it is disbursed. You can pay the interest while you are in school and during grace periods, deferment or forbearance, or you can allow the interest to accrue.  

For military service employees, the interest rate on loans obtained before entering military service may be capped at 6% during your military service. However, you need to contact your loan servicer to request this benefit. Interest is not charged for loans disbursed after October 1, 2008 for up to 60 months, while serving on active duty, serving in a hostile area, performing qualifying National Guard duty during a war or an emergency. 

Private loans may initially offer a low interest rate similar to a balance transfer credit card, but the interest rate is variable and can increase at any time. The Georgetown University Center on Education predicts that by 2018, approximately 63% of all jobs will require some graduate school education.

Consider going to a cheaper college and create a budget for the lifestyle you want to have when you graduate college.  Determine if you will be able to afford to make the minimum loan payments before applying for the student loans.  Unexpected events occur frequently and it is best to plan ahead instead of waiting until the last minute or being blindsided by an unexpected expense.

The Student Loan Dilemma

Prior to the Healthcare Reform law, private companies that offered student loans which were subsidized and guaranteed by the federal government. Under the Healthcare Reform Law the government now lends the money directly to students eliminating the need for private lenders. The money will go towards providing more grants to students. However, this has caused an increase in companies offering private student loans.

Private loans require a credit check and cannot be discharged in bankruptcy. Private loans offered through college have higher interest rates compared to federal student loans and accrue interest while students are in school. Since the Healthcare Reform, Sallie Mae which offers private loans now offers a Smart Option Student loan with an interest rate of 2.8% and allow students to lower their interest rates by paying on interest which still in school. Wells Fargo offers private loans with variable rates and student can reduce their interest rate three quarters of one percent if the student graduates.

The student loan default rate has increased to 7%. Many colleges are controlled by privately traded companies on the stock exchange and investors are always looking for ways to exploit low-income students. According to a report by the Education Trust titled “Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities”, private for-profit colleges take advantage of students by offering high interest loans.

According to the report, only 22% of students who enroll in a 4 year degree program graduate within 6 years. A U.S. Department of Education report states that Arizona has the highest rate of student loan defaults in the country. In contrast, the student loan default rate in Missouri is 5.8% which it achieves through grants to institutions and financial literacy programs. Grants are used to teach students financial literacy. Assistant Commissioner Leanne Cardwell, states that financial literacy outreach is critical to reducing default rates and student debt load.

Getting private student loans for college should be a last resort. Here are 8 ways reduce college tuition and student loan debt.

1. Apply for financial aid. Apply for at least 50-100 college scholarships and apply for the FAFSA January 1.

2. Plan for college costs early. If you will have to pay for college yourself get a part-time job as soon as you are old enough to work and put at least 50% of the money in a high interest savings account.

3. Ditch the high bill. It is nice to attend an Ivy League school but the tuition will cost you. Consider attending a less expensive school.

4. Work at school. Research getting a job which in school through the colleges’ work-study program.

5. Student loan forgiveness. Research student loan forgiveness programs before applying for a job after graduation to see which industries offer the best program for you. You may have to delay that 6 figure job until your student loan debt is paid down. Visit finaid.org for more information.

6. Apply for federal loan. Apply for federal student loans first which offer lower interest rates and multiple repayment programs.

7. Read the fine print. Read the fine print on student loan applications especially the interest rate, default penalties, repayment options, balloon payments, and prepayment options.

8. School decision. If feel strongly about attending the school of your choice with a high tuition, attend a school that offers a higher starting salary. CNBC ranked 16 schools that offer high starting salaries upon graduation. For more information visit cnbc.com/id/40703034.