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.

Government Help for Student Loan Borrowers

                              

On March 10, 2015, President Obama signed the Student Aid Bill of Rights. Since 2003 delinquency rates on student loan has steadily increased. According to the National Center for Education Statistics, from 2003 through 2011, outstanding student loan debt increased from approximately $250 billion to over $900 billion. Since the mortgage crisis in 2008 the total outstanding student loan debt has gone from billions to trillions. According to the Federal Reserve the total outstanding student loan debt at the end of 2014 was $1.3 trillion dollars. 

The rise in student loan debt from 2003 to the present is a result of:  increased tuition costs, increased health care costs, the sandwich generation’s expenses (i.e. caring for children and parents), government initiatives to encourage funding for higher education, post-graduate degrees, the 2008 recession, unemployment, and increased cost of living just to name a few. 

According to The Institute for College Access and Success (TICAS) the average student loan debt has outpaced the average credit card debt. In May 2014 Federal Reserve report, covering first quarter of 2014, student loan debt totaled $1.1 trillion, while credit card debt totaled $659 billion. Student loan debt may replace mortgage loans as the largest form of consumer debt. Student loan debt is currently the second largest form of consumer debt. 

For some student loan borrowers, paying back student loans is a lifetime commitment. For others it means the different in paying a credit card bill, paying monthly expenses versus repaying student loans. Many borrowers are still struggling from the effects of the 2008 recession and 2013 government shutdown. Statistics state that only way to increase your financial status is to get a college education. However, research neglected to tell borrowers the long-term price tag associated with it. There seems to be no way out. 

If borrowers experience an issue with a private loan servicer or collection agency they can file complaints with the Consumer Financial Protection Bureau, Department of Veteran Affairs (for veterans), the Department of Defense and the Federal Trade Commission. The Student Aid Bill of Rights provides federal student loan borrowers with a glimmer of hope. The bill offers to:

1. Provide affordable higher education
2. Provide easy to find resources to pay for college
3. Provide affordable repayment options
4. Receive quality customer service, reliable information and fair treatment when repaying student loans
5. Provide an online feedback system starting in July 2016 to give borrowers an easy way to provide feedback and file complaints about federal student loan lenders and servicers and collection agencies.
6. Notify borrowers when their federal student loans are transferred to a new servicer.
7. Restrict debt collections on penalties and interest fees charged on defaulted student loans.
8. Allow low-income and disabled borrowers to enroll and stay enrolled in income-based repayment plans and ensure disabled borrowers can discharge federal student loan debt versus having their Social Security Disability benefits garnished.
9. Improve disclosures regarding student loans and provide stronger consumer protections during the loan repayment lifecycle.
10. Requires prepayments be applied to loans with the highest interest rate first unless the borrower requests otherwise.
11. Establish a centralized database for federal student loan borrowers to access account and payment processing information.

This is a good start but more needs to be done to help student loan borrowers for both federal and private student loans. My recommendations are:

1. Make private loan companies offer the same repayment options as the Department of Education for federal loans such as: loan deferment, income-based repayment plans, loan consolidation, rehabilitation, and student loan forgiveness.
2. Develop and enforce strict guidelines for private loan servicers, collection agencies and debt collectors for student loans similar to guidelines that were implemented for mortgage lenders.
3. Revise the 2005 Bankruptcy Law to include federal and private loans.
4. Increase the maximum federal Pell Grant amount to $10,000 per award year and increase the amount yearly by a minimum of $1,000 in correlation to college tuition increases.
5. Simplify the income-based repayment system into one option and base monthly payments on income and a review of a borrower’s monthly expenses. Payments will increase as a borrower’s income increases.
6. Stop allowing collection agencies and debt collectors to charge fees and refuse borrower offered payment arrangements on federal student and parent plus loans.
7. Allow parent plus loans to be refinanced and consolidated.

How to Easily Pay Off Student Loan Debt

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 easy ways to pay off student loan debt using student loan forgiveness programs:

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

3.      Pay as you earn. https://studentloans.gov/myDirectLoan/index.action.

4.      The American Federation of Teachers maintains a list of other loan forgiveness programs for teachers, http://www.aft.org/funding-database/stafford-loan-forgiveness-program, http://www.aft.org/funding-database/perkins-loan-forgiveness.

5.      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.

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

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

8.      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.

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

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

11.   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.

12.   US Department of Education Cancellation/Deferment Options for Teachers studentaid.ed.gov/PORTALSWebApp/students/english/teachercancel.jsp?tab=repaying and Teacher Loan Forgiveness Form https://www.myeddebt.com/borrower/PDFFrames.jsp?fileName=form.teacher.loan.forgiveness.pdf.

13.   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.

14.   The Federal Student Loan Repayment Program http://www.opm.gov/policy-data-oversight/pay-leave/student-loan-repayment/ allows federal agencies to make payments directly to the student loan holder.

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