Nolotag:www.nolo.com,2021-05-18://1562024-03-28T11:22:08ZHow to Get Out of Default on Your Federal Student Loans5387892018-06-25T21:23:32Z2024-03-26T14:43:01ZAmy Loftsgordon
Legal Update: After the U.S. Supreme Court struck down President Biden's debt cancellation plan, the administration introduced a 12-month "on-ramp" repayment program. Beginning October 1, 2023, and for a year after that, the Education Department won't report borrowers who miss payments to the credit bureaus, consider them delinquent, place them in default, or refer them to debt collection agencies. But interest will accrue.
In addition, the Biden Administration announced that, in February 2024, it would start canceling federal student loan debts for anyone who initially borrowed $12,000 or less and has been in repayment for at least 10 years if they first enroll in the SAVE income-based repayment plan. The timeframe for loan forgiveness increases by one year with each additional $1,000 of debt. So, for example, a student who took out $14,000 in loans would have their debts canceled if they've been making payments for 12 years. It doesn't matter what repayment plan or plans you previously had, so long as you were actively repaying your loans and are enrolled in the SAVE plan. In the future, the Department of Education will continue to identify and forgive the loans of eligible borrowers on an ongoing basis.
Also, if you're paying your loans under an income-driven repayment (IDR) plan or are seeking Public Service Loan Forgiveness (PSLF), usually consolidating your loans would cause you to lose credit for qualifying payments you've already made toward IDR forgiveness or toward PSLF. But if you apply to consolidate your student loans (see below) by April 30, 2024, you can get credit for forgiveness as far back as your first loan payment on the oldest of the original loans in the bundle.
According to chamberofcommerce.org, one-quarter of student loan borrowers (10.3 million) owe $40,000 or more in federal student loans. And for many, repaying those loans will be a challenge. But defaulting on your federal student loans can lead to severe consequences, like:
tax refund offsets and federal benefits intercepts (sometimes called “Treasury offsets”)
wage garnishment, and
the loss of eligibility for deferment, repayment plans, and probably forbearance.
You might also find continuing your education or returning to school difficult because the Department of Education can deny you eligibility for new education grants or loans.
If you go into default on your federal student loans, you might be able to resolve the matter by rehabilitating your loans or consolidating them.
What It Means to Default On Your Federal Student Loans
If your FFEL or Direct Loan payments are due monthly, default will occur after 270 days—about nine months—of missed payments. If your payments are due less frequently than monthly, default occurs after 330 days of missed payments, about 11 months.
But a Perkins loan is in default as soon as you miss a payment or violate any other term of the payment agreement.
Rehabilitating Your Federal Student Loans to Get Out of Default
To rehabilitate a defaulted student loan, you must make nine payments within 20 days of the due date over the course of ten months. The servicer will set the amount of the payments.
How the Servicer Determines Your Payment Amount
You must submit information about your income, and the servicer will calculate a “reasonable and affordable” monthly payment based on that information and the federal poverty guidelines.
First, the servicer will find 150% of the poverty level for your family size. Then, the servicer will then determine your “discretionary income” by subtracting the amount from your adjusted gross income (AGI) in your most recent tax return. The payment will be equal to 15% of your discretionary income.
What to Do if the Payment is Still More Than You Can Afford
If the amount is still more than you can afford, you may submit documentation of your expenses. The servicer can determine a lower payment by deducting reasonable expenses. In all cases, the payment must be at least $5 per month.
What Happens Once the Payment is Set
Once your payment has been set, your servicer will send you documentation of the payment amount, which may require a rehabilitation agreement.
Collection fees usually will continue to accrue on your loan as long as it is in default and can be as much as 18.5% of the loan balance. These fees are in addition to the interest, which will normally continue to accrue.
How Rehabilitating Your Federal Student Loans Affects Your Credit
After completing your rehabilitation payments, the loan will no longer be in default. The servicer will remove all references to the default status from your credit reports. But the previous late payments will continue to be reported.
Federal Student Loan Consolidation to Get Out of Default
Nearly all defaulted federal student loans can be consolidated into a Direct Consolidation Loan. Combining your student loans through consolidation is a faster and cheaper way to get out of default on federal student loans than rehabilitation.
You don’t have to pay fees to consolidate your loan, and consolidation should be completed in fewer than six months. So, collection fees will accrue for a shorter amount of time than under a rehabilitation plan.
However, be sure to consider the pros and cons of federal student loan consolidation (see below) before taking this step. First, here are some basics about the program.
You Get to Pick the Servicer When You Consolidate
When you consolidate, you must choose a servicer for your loan. This opportunity can be advantageous if you’ve had a bad experience with your current servicer. You will also select a repayment plan.
Requirements for Federal Student Loan Consolidation
You’ll have to make three payments before consolidating unless you choose an income-based repayment plan. If you're married and applying for an income-based repayment plan, your spouse must usually also sign the request.
Also, remember that you must submit income verification each year that you’re enrolled in an income-based repayment plan.
How Federal Student Loan Consolidation Affects Your Credit
Pros and Cons of Federal Student Loan Consolidation
Before you move forward with a Direct Consolidation Loan, consider both the advantages and disadvantages.
Advantages of Federal Student Loan Consolidation
Consolidating your federal student loans into a Direct Consolidation Loan offers some potential advantages.
You Might Pay Less Each Month
Consolidating your loans could lead to lower monthly payments because the repayment term is extended up to 30 years.
The Interest Rate Is Fixed
Direct Consolidation Loans have a fixed interest rate. Since July 1, 2006, all federal student loans have a fixed interest rate. But if you have federal loans, except Perkins Loans, that were disbursed before this date, you might have a variable interest rate on one or more of your loans. If the variable rate loans that you’re consolidating currently have low rates, you can lock in a fixed low rate by consolidating.
The new interest rate is determined based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of a percent.
You’ll Make Only One Payment Each Month
After your loans are consolidated, you’ll only have to make one payment each month instead of multiple payments on various loans. For many people, keeping track of their student loan balance is easier.
You Could Get Access to Different Repayment Options
By consolidating, you might get access to a repayment plan that wasn’t previously available to you. You can repay a Direct Consolidation Loan, in most cases, with:
a standard repayment plan
a graduated repayment plan
an extended repayment plan
the Income-Contingent Repayment (ICR) Plan
the Pay As You Earn Repayment Plan (PAYE)
the Saving on a Valuable Education (SAVE) Plan
the Revised Pay As You Earn Repayment Plan (REPAYE), or
an Income-Based Repayment (IBR) Plan.
You Can Get Access to the Public Service Loan Forgiveness (PSLF) Program
Consolidated loans are eligible for the PSLF program. So, federal loans originating under the FFEL program or the Perkins loan program can be consolidated into a new Direct Consolidation Loan to qualify for PSLF. Otherwise, these kinds of loans usually aren’t eligible for the PSLF program.
But including a Perkins Loan in a consolidation loan will cause the loss of other specific cancellation benefits only available for that program.
You Might Get Access to Other Loan Forgiveness Options
With a Direct Consolidation Loan, you'll get access to income-based repayment plans that provide loan forgiveness.
Why You Might Not Want to Get a Direct Consolidation Loan
The following are a few potential downsides to consolidating your federal student loans under the Direct Consolidation Loan program.
You Might Be On the Hook for More Interest
Again, consolidation will extend the repayment period—perhaps to 30 years—which lowers the monthly payment. But you’ll pay more interest over the life of your loan. If you’ve just about paid off your student loans, it might not be worthwhile to consolidate.
Also, because the rate is based on the average rate of your consolidated loans, the rate on a consolidation loan might be higher than it was on some of the loans before you consolidated. So, if you have one or more loans with significantly higher interest rates, it might make sense not to consolidate those loans and instead focus on trying to pay them off more quickly.
You Don’t Get a Grace Period
With a Direct Consolidation Loan, you don’t get a grace period. The repayment period starts immediately upon consolidation, and the first payment will be due in around 60 days.
However, if any of the loans you want to consolidate are still in the grace period, you can delay the processing of a Direct Consolidation Loan until the end of a grace period if you make this selection in the application.
You Won’t Get an Immediate Credit Score Boost If You Were In Default
If you were in default, your report will reflect that your previous loans were in default but are now paid in full through the new loan. So, consolidating your loans won’t immediately help your credit. But if your payments are affordable after you consolidate and you continue to make on-time payments, your credit scores will begin to improve.
On the other hand, if you rehabilitate your federal student loans, the lender will remove the default from your credit history (but not your history of late payments).
Your Prior Payments Won’t Count Toward Loan Forgiveness
You don't get to count any payments that you made on a loan before you consolidated for loan forgiveness requirements; consolidation restarts the clock on loan forgiveness programs. So, you lose credit for any payments made toward forgiveness, like income-driven repayment plan forgiveness and PSLF.
You Might Lose Some Benefits Associated With the Loans You’re Consolidating
By consolidating, you could lose other benefits, like reduced interest rates, principal rebates, repayment incentive programs, or loan cancellation benefits that are available under the loans that you’re consolidating. Again, if you include a Perkins Loan in the consolidation, you’ll lose certain cancellation benefits only available from that program.
Can You Rehabilitate or Consolidate a Student Loan Twice?
Both rehabilitation and consolidation are available only once for each federal student loan. But it’s possible to consolidate just one loan. So, you could get out of default quickly on a particular loan while retaining the ability to consolidate other federal student loans if you default on a different one.
How to Rehabilitate or Consolidate Your Student Loans
To consolidate or to start a loan rehabilitation arrangement related to your defaulted federal student loans, contact the Department of Education's Default Resolution Group, or call them at 800-621-3115 (TTY for the deaf or hearing-impaired 877-825-9923) for assistance. Learn more at StudentLoans.gov.
Other Ways to Get Out of Default On Your Federal Student Loans
A few other options for getting out of default are getting a discharge, repaying the full loan amount, or refinancing the loan.
Applying for a Discharge of Your Federal Student Loans
In some cases, you might qualify for student loan forgiveness (also called a loan "discharge" or "cancellation"). If you think you qualify for loan forgiveness under one of the many programs, you should apply even if you’re in default. However, you might have to get out of default to qualify.
Paying Off Your Federal Student Loans
If you have money available, it could make sense to pay off the loan.
Refinancing Your Federal Student Loans
Private lenders usually require a cosigner. Depending on the cosigner’s credit scores, a private lender might be willing to refinance your defaulted loan.
Sometimes, it makes sense to refinance a federal student loan as a private loan. But you'll lose access to federal repayment plans, repayment incentives, and forgiveness programs. Make sure that it's in your best interest to refinance before you do so. It usually isn't.
Getting Help
To find out more about how to get out of default, ask your servicer.
If you need help dealing with your servicer or need information about your available options, consider consulting with a student loan attorney or debt settlement attorney who deals with student loans.
]]>What Happens If You Default on Your Federal Student Loans4661852011-10-10T22:04:02Z2024-03-25T18:00:25ZAmy Loftsgordon
Legal Update: Borrowers who have defaulted on their federal student loans can have their loans returned to good standing, any delinquency cured, and again get access to several student aid benefits under the "Fresh Start" initiative. The Fresh Start program will end on September 30, 2024.
Also, after the U.S. Supreme Court struck down President Biden's debt cancellation plan, the administration introduced a 12-month "on-ramp" repayment program. Beginning October 1, 2023, and for a year after that, the Education Department won't report borrowers who miss payments to the credit bureaus, consider them delinquent, place them in default, or refer them to debt collection agencies. But interest will accrue.
In addition, the Biden Administration announced that, in February 2024, it would start canceling federal student loan debts for anyone who initially borrowed $12,000 or less and has been in repayment for at least 10 years if they first enroll in the SAVE income-based repayment plan. The timeframe for loan forgiveness increases by one year with each additional $1,000 of debt. So, for example, a student who took out $14,000 in loans would have their debts canceled if they've been making payments for 12 years. It doesn't matter what repayment plan or plans you previously had, so long as you were actively repaying your loans and are enrolled in the SAVE plan. In the future, the Department of Education will continue to identify and forgive the loans of eligible borrowers on an ongoing basis.
And if you're paying your loans under an income-driven repayment (IDR) plan or are seeking Public Service Loan Forgiveness (PSLF), usually consolidating your loans would cause you to lose credit for qualifying payments you’ve already made toward IDR forgiveness or toward PSLF. But if you apply to consolidate your student loans (see below) by April 30, 2024, you can get credit for forgiveness as far back as your first loan payment on the oldest of the original loans in the bundle.
When you miss a payment on most debts, your account will go into default at that time or shortly afterward. For instance, when you fall behind on a credit card payment or mortgage loan, the lender typically lets you know you're in default soon after.
But default usually doesn’t happen immediately regarding federal student loans. You default on most federal student loans only after several missed payments.
While you won’t go into default right away, defaulting on your federal student loans has serious consequences. The government has powerful tools to use against borrowers who don't make student loan payments.
What Happens After You Miss a Payment on Your Student Loan?
When a Federal Family Education Loan (FFEL) or Direct Loan borrower misses a payment, the loan becomes delinquent. The servicer might contact you and tell you about different repayment options.
While the new servicer might sound a lot like a debt collector, it usually isn’t one. If you don't get caught up, a debt collector will come into the picture later (see below).
When your loan is delinquent, you have many options to avoid default, like requesting a deferment, getting a forbearance, or consolidating your loans.
What It Means to Default On Your Student Loans
If your FFEL or Direct Loan payments are due monthly, default will occur after 270 days (about nine months) of missed payments. If your payments are due less frequently than monthly, default occurs after 330 days of missed payments (about 11 months).
But a Perkins loan is in default as soon as you miss a payment or violate any other term of the payment agreement.
What Happens After You Default on Student Loans?
While federal student loans are generally more lenient than most other loans regarding when default happens, the repercussions of defaulting on federal student loans are much more severe than for most other debts. You might face:
a tax refund offset
a garnishment, and
collection actions, like collection calls and a lawsuit.
You might also lose your eligibility for a deferment, repayment plans, and probably forbearance. In addition, you might be putting a professional license at risk.
What Is a Tax Refund Offset?
Intercepting tax refunds is the method the government most frequently uses to collect outstanding student loan dollars. With a "tax refund offset," the Department of Education refers the debt to the U. S. Treasury Department for collection. The Treasury Department then applies any tax refunds due to you to the payment of the student loan debt.
Each year the federal government pockets hundreds of millions of dollars by grabbing tax refunds (without having to get a judgment first) from defaulted student loan borrowers.
And if you legitimately owe the money, stopping a tax refund intercept is very difficult.
Notification when your tax refund will be taken for unpaid student loans. Before the government takes your money, you'll get notice, an opportunity to review the loan records, and a chance to challenge this decision.
Defenses to a tax refund offset. A few of the possible defenses that might stop a tax refund intercept are:
Your debt has been paid.
It’s not your loan.
You entered into a repayment agreement with the loan holder, and you’re making the required payments.
You have filed for bankruptcy, and the case is still pending, or the debt was discharged.
The borrower is dead.
The debt isn’t enforceable, perhaps due to forgery.
You’re eligible for a student loan discharge, like a closed school discharge.
Stopping tax refund offsets. You can try to stop the tax refund offset by requesting a review. If you agree you owe part of all of the debt, or your objections are denied, you'll need to make a timely agreement to pay the debt and begin to pay to stop the offset and avoid future offsets. In rare cases, the government might stop a tax refund offset if you're facing a serious and urgent financial hardship, such as a foreclosure or an eviction.
Minimizing a tax refund intercept. If your tax refund is small, you will have less to lose from an intercept. To ensure your tax refund is minimal, you can increase the money you receive with your paycheck during the year. For example, suppose you got a $1,440 tax refund last year. This year, you might want to ask your employer to take out $120 less each month. Use the IRS withholding calculator to help you figure out how much to ask your employer to withhold.
Social Security Garnishments to Repay Student Loans
The Debt Collection Improvement Act of 1996 (31 U.S.C. § 3716(c)(3)(A)(i)) allows federal government agencies to offset Social Security benefits to collect debts like student loans. However, the government must let you keep a certain amount. Specifically, the Act exempts benefit payments totaling $9,000 over a 12-month period ($750 on a monthly basis), and the government can't take more than 15% of your benefit.
Unlike almost every other kind of debt, no statute of limitations applies to the collection of federal student loans. So, even 20 or 30 years after you went to school, the government can continue to try to collect your loans.
If you’re totally and permanently disabled, though, you could be eligible for cancellation of your federal student loans. Many people aren’t aware of this option and continue to have their Social Security garnished.
Your Paycheck Garnished
The government can garnish a limited portion of the wages of a student-loan debtor who’s in default. It can take up to 15% of your disposable income without taking you to court.
But no matter what, you're allowed to keep an amount equal to 30 times the federal minimum wage per week. As with the tax refund offset, you can object to wage garnishment.
Loans Placed With a Collection Agency
If you default on a federal student loan, the Department of Education may transfer your account to a debt collector. Debt collectors are paid fees and commissions from the payments you send to the collector.
A percentage of every payment that you make on your student loan goes towards the collection fees. For example, if a collection agency charges 25%, and you pay $1, only $.75 will be applied to your loan balance. The rest ($.25) will go towards the collection fees.
If your payment doesn't cover the fee and full interest accruing on the loan, your loan balance can rise quickly.
You Get Sued
The government might sue you. Again, unlike other debts, the law doesn't provide a time limit (a statute of limitations) for a lawsuit to collect federal student loans.
You’ll Lose Eligibility for Deferment, Repayment Plans, Probably Forbearance
If you’re merely delinquent, you’re still eligible for deferment and different types of repayment plans. But you’ll lose this eligibility once the loan goes into default.
A delinquent loan is eligible for forbearance, and federal law says that a servicer has discretionary power to allow forbearance on a defaulted loan. (34 C.F.R. § 682.211(a)(1), 34 C.F.R. § 685.205(a)(8)). Unfortunately, the Department of Education doesn’t agree with this interpretation and says forbearance isn't available after default.
Your State Might Revoke Your Professional or Other License
If you default on your federal student loans, you could lose your professional or another type of license. Approximately 20 states allow the government to suspend a state-issued professional license, like a nursing, teaching, or law license, or another kind of license, like a driver’s or even a fishing license, after a borrower goes into default.
How Does Defaulting on a Student Loan Affect Your Credit?
For federal student loans, the servicer usually won’t report your loan as late to the credit reporting agencies until the payment is more than 90 days late. (If you have private student loans, though, the servicer will probably report it as late after 30 days.) This reporting will lower your credit scores.
A default normally remains on your credit reports for seven years. But if you rehabilitate your loans, the credit reporting agencies will remove any mention of the default from your credit files. However, your late payment history before you entered default status will stay on your credit reports.
Rehabilitation or Consolidation to Get Out of Default
One way to get out of default on a federal student loan is to rehabilitate it by making good-faith payments. Combining your student loans into a Direct Consolidation Loan is a another way to get out of default on federal student loans.
Getting out of default is important to qualify for certain federal repayment plans, borrow new loans to return to school, or improve your credit rating.
How Federal Student Loan Rehabilitation Works
With loan rehabilitation, you make ninevoluntary, reasonable, and affordableloan payments within 20 days of the due date over a period of ten consecutive months. The payments must be reasonable and affordable based on your total financial circumstances. A “reasonable and affordable” payment is equal to 15% of your annual discretionary income, divided by 12. Discretionary income is the amount of your adjusted gross income—taken from your most recent federal income tax return—that is more than 150% of the poverty guideline amount for your state and family size. You'll have to provide documentation about your income.
If you can't afford this amount, ask for an alternative monthly payment. The payment will be based on the amount of your monthly income that remains after reasonable amounts for your monthly expenses have been subtracted. To rehabilitate your loan, you must select one of the two payment amounts, which could be as low as $5, depending on your income.
Also, rehabilitation payments must be voluntary—that is, they can't be payments towards your loan that come from agarnishment or tax refund offset. If your payments are currently made through garnishment, you'll have to contact your loan servicer and attempt to set up a voluntary payment plan.
You can rehabilitate defaulted loans only once. If you rehabilitate a loan and then default again, you can't rehabilitate it another time. And be aware that curing a default through rehabilitation will increase your loan’s principal balance.
Again, if you rehabilitate a loan, credit reporting agencies will remove any mention of the default from yourcredit reports. But any history of late payments before you entered default status will remain on your reports.
How Federal Student Loan Consolidation Works
Under the federal Direct Consolidation Loan program, you may consolidate (combine) one or more of your federal student loans into a new loan. The new loan will have a fixed interest rate based on the average interest rates on consolidated loans.
Almost all federal student loans are eligible for consolidation.
Getting Help
If you’ve missed a few payments on a federal student loan, don’t panic. You probably have time to avoid going into default. You can request a number of deferments, you might have forbearance options, or you might be able to consolidate your defaulted student loans. And, in limited circumstances, federal student loan borrowers can qualify for loan forgiveness.
Contact your loan servicer or a consumer protection attorney who deals with student loans to find out more about what options are available in your situation.
]]>How to Get Out of Student Loan Debt4563012012-08-01T23:31:18Z2024-03-21T19:52:16ZKathleen MichonLegal Update: After the U.S. Supreme Court struck down President Biden's debt cancellation plan, the administration introduced a 12-month "on-ramp" repayment program. Beginning October 1, 2023, and for a year after that, the Education Department won't report borrowers who miss payments to the credit bureaus, consider them delinquent, place them in default, or refer them to debt collection agencies. But interest will accrue.
In addition, the Biden Administration announced that, in February 2024, it would start canceling federal student loan debts for anyone who initially borrowed $12,000 or less and has been in repayment for at least 10 years if they first enroll in the SAVE income-based repayment plan (see below). To get forgiveness, it doesn't matter what repayment plan or plans you previously had, so long as you were actively repaying your loans and are enrolled in the SAVE plan. In the future, the Department of Education will continue to identify and forgive the loans of eligible borrowers on an ongoing basis.
Many of the millions of Americans who struggle to pay their federal student loans want to know: Can I reduce or eliminate my student loan debt? In very limited circumstances, getting rid of student loan debt is possible. But most people won't be able to wipe out some or all of their loans.
The good news is that some people are eligible to reduce monthly payments, get a temporary break from payments, or take advantage of other ways to manage their student loan payments better.
Below is an overview of your options if you struggle to pay your student loans.
Income-Based Repayment Plans to Help Get out of Student Loan Debt
If your income is low or unstable, or you have very high student loan debt compared to your income, you might be eligible for one of the below plans.
Saving on a Valuable Education (SAVE) Plan
In 2023, the Biden Administration introduced anew income-driven repayment plan—the Saving on a Valuable Education (SAVE) plan.This plan lowers undergraduate borrowers' monthly payments to 5% of their discretionary income. Those with undergraduate and graduate loans will pay a weighted average between 5% and 10% of their income, depending on the original principal balances of their loans. In some cases, payments will be $0. And under this plan, your unpaid interest won't accrue if you make your full monthly payments.
In addition, the remaining loan balance is forgiven after 10 years of payments for borrowers with original loan balances of $12,000 or less, with the maximum repayment period before forgiveness rising by one year for every additional $1,000 borrowed up to a maximum of 20 or 25 years. For example, if you originally borrowed $14,000, you receive loan forgiveness after 12 years. Payments you made before 2024 and those made thereafter count toward these forgiveness timeframes.
All student borrowers in repayment are eligible for the SAVE plan, and borrowers already in a Revised Pay as You Earn (REPAYE) plan are automatically enrolled in SAVE. To learn more about the SAVE plan, visit the Education Department's website.
Income Contingent Repayment Plan (ICR)
If you have a federal Direct Loan, you can opt for this plan which calculates your payment amount based on your income. Under this plan, your monthly payment is the lesser of
20% of your discretionary income, or
the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
The government will forgive the remaining balance if you haven't paid off your loan after 25 years.
Income Sensitive Repayment Plan (ISR)
In this plan, which is only available for certain types of loans (subsidized and unsubsidized Federal Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans), your payments are based on your annual income, family size, and total loan amount.
Income-Based Repayment Plan (IBR)
You can get an IBR plan for:
Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
all PLUS loans made to students, and
Consolidation Loans (Direct or FFEL) that don't include Direct or FFEL PLUS loans made to parents.
This plan requires payments equal to 10% of your discretionary income if you're a new borrower on or after July 1, 2014 (but never more than the ten-year standard repayment plan amount) or 15% of your discretionary income if you're not a new borrower on or after July 1, 2014 (again, never more than the ten-year standard repayment plan amount).
If you haven't paid off your loan after 20 years (new borrowers on or after July 1, 2014) or 25 years (if you're not a new borrower on or after July 1, 2014), the government will forgive the remaining balance.
Pay As You Earn Repayment Plan (PAYE)
Under this plan, your monthly payments are 10% of your discretionary income, but never more than the ten-year standard repayment plan amount. (Under a standard repayment plan, the payments are a fixed amount.)
The following types of loans are eligible for this repayment plan:
Direct Subsidized and Unsubsidized Loans
Direct PLUS loans made to students, and
Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents.
The rest is forgiven if you haven't repaid your loan in full after 20 years.
Revised Pay As You Earn Repayment Plan (REPAYE)
Much like PAYE, your monthly payments are 10% of your discretionary income under this plan. Your outstanding balance is forgiven if you haven't repaid the loan in full after 20 or 25 years. The following types of loans are eligible for REPAYE:
Direct Subsidized and Unsubsidized Loans
Direct PLUS loans made to students, and
Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents.
Other Repayment Plans for Student Loan Debt
Other types of repayment plans include a standard repayment plan, a graduated repayment plan, and an extended repayment plan.
Consolidating Your Student Loans to Reduce Student Loan Payments and Interest
A Direct Consolidation Loan allows you to combine one or more of your federal student loans into a single loan with one monthly payment. This kind of loan can be helpful if you want to reduce your interest rate, you don’t qualify for another payment plan program, you qualify for another payment program but still can’t afford the payments, or you want to get out of default.
Deferring Student Loans to Delay Paying Student Loan Debt
A deferment excuses you from making student loan payments for a set amount of time because of a specific condition in your life—such as returning to school, economic hardship, or unemployment. Interest won't accrue on subsidized loans during the deferment period.
Getting a Forbearance to Stop Paying off Student Loan Debt Temporarily
With loan forbearance, your loan holder permits you to stop making payments for a set amount of time or to make reduced payments temporarily. Common reasons supporting a forbearance include poor health, unforeseen personal problems, inability to pay the loan within ten years (or other loan term period), or monthly loan payments over 20% of your income.
Canceling Student Loans to Get Rid of Student Loans
In some situations, you can get rid of your student loans altogether, which is referred to as student loan "forgiveness," "cancellation," or "discharge." You must meet very specific criteria. Sometimes, you can cancel part of the loan but not the entire loan.
The circumstances in which you might be able to cancel your student loan include:
You attended or were enrolled in a school that closed while you were there, before you started classes, or within a certain time frame afterward.
Your school refused to refund you money that it owed to you because you didn't attend the school or withdrew.
Your school didn't make sure that you were qualified to attend the program, called "false certification."
You work in certain occupations after graduation, like teaching or some public service jobs.
You're unable to work because of an illness or injury—a total and permanent disability—that's expected to continue for five or more years or result in your death.
If the person owing the loan dies, the loan obligation ends.
Discharging Student Loans in Bankruptcy To Get Out of Student Loans
Generally, it’s been very difficult to discharge student loans in bankruptcy. You must demonstrate that it would be an undue hardship for you to pay them, and courts have historically been reluctant to find that debtors meet this standard.
In 2022, the Biden administration introduced a new student loan bankruptcy policy to make it easier for borrowers to discharge their student loan debts in bankruptcy. Student loan borrowers have to fill out a lengthy form, explaining their financial struggles and making their case for a discharge.
The Justice Department, along with the Department of Education, reviews the information provided, applies the factors that courts consider relevant to the undue-hardship inquiry, and then determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt.
To get assistance in dealing with your servicer or to get help understanding the different repayment, deferment, forbearance, and forgiveness options for federal student loans, consider consulting with a student loan attorney or debt negotiation attorney who deals with student loans.
]]>Can My Student Loan Creditor Garnish My Wages?4499212012-10-10T21:28:10Z2024-01-12T17:39:26ZAmy Loftsgordon
Legal Update: After the U.S. Supreme Court struck down President Biden's debt cancellation plan, the administration introduced a 12-month "on-ramp" repayment program. Beginning October 1, 2023, and for a year after that, the Education Department won't report borrowers who miss payments to the credit bureaus, consider them delinquent, place them in default, or refer them to debt collection agencies. But interest will accrue.
In addition, the Biden Administration announced that, in February 2024, it would start canceling federal student loan debts for anyone who initially borrowed $12,000 or less and has been in repayment for at least 10 years if they first enroll in the SAVE income-based repayment plan. The timeframe for loan forgiveness increases by one year with each additional $1,000 of debt. So, for example, a student who took out $14,000 in loans would have their debts canceled if they've been making payments for 12 years. It doesn't matter what repayment plan or plans you previously had, so long as you were actively repaying your loans and are enrolled in the SAVE plan. In the future, the Department of Education will continue to identify and forgive the loans of eligible borrowers on an ongoing basis.
Student loan creditors can garnish your wages if you go into default. Whether your loan is a federal student loan or not dictates whether the creditor must first sue you in court, and how much it can garnish from your paycheck.
Federal Student Loans: The Government Doesn't Need a Judgment to Garnish
Most creditors must first sue you in court and get a money judgment in order to start garnishing your wages. Federal student loans, however, get special status. The government doesn't have to get a court judgment before attempting to garnish your wages. Though, if your wages can't be garnished—say you're self-employed—the Department of Justice might then sue you to collect on your defaulted loan.
How Much Can a Student Loan Holder Garnish?
Federal law allows the loan holder to garnish up to 15% of your disposable pay. You'll get a 30-day notice that explains the U.S. Department of Education's intention to garnish your wages, which explains the nature and amount of your debt, your opportunity to inspect and copy records relating to your debt, your right to object to garnishment, and your option to avoid garnishment by voluntary repayment.
Your Right to a Hearing
You get the right to request a hearing—the request must be in writing and postmarked no later than 30 days after the garnishment notice was sent—in which you may present evidence and get a ruling on:
any objections you have to the existence, amount, or enforceability of the debt
any objections you have because garnishing 15% of your disposable pay would create an extreme financial hardship for you, or
any objections you have stating that garnishment can't be used at this time because you’ve been employed for less than 12 months after having previously been involuntarily separated from employment.
Your loan holder will arrange the hearing, which may be in person or over the phone, or based on records you submit. The garnishment will be postponed until the hearing is completed. If you aren't successful at your hearing, then your wages will be garnished. But if you are successful, then your wages won't be garnished for a period of 12 months or the amount garnished might be reduced. (Partial garnishments are reviewed annually).
One way to avoid garnishment of your pay is to work out repayment terms acceptable to the Department of Education or the private collection agency. Make sure your first payment is received no later than 30 days after the date the garnishment notice was sent.
Private Student Loans
Private student loans don't have any special status, which means normal garnishment rules apply. The creditor must first sue you in federal or state court, obtain a judgment, and then submit a court order to your employer directing it how much garnish. (Learn more about the regular wage garnishment process and the wage garnishment rules in your state.)
]]>Challenging a Student Loan Wage Garnishment4502672013-04-29T18:13:35Z2024-01-11T00:05:34ZIf you've received a letter warning you that your student loans are in default and threatening garnishment of your wages, or if your employer is already garnishing your wages, you should review your options carefully. You might be able to challenge the student loan wage garnishment.
The earlier you address a student loan wage garnishment, the more likely you will be successful in reducing or stopping the garnishment. This article addresses the rules for garnishment of federal student loan debts. The rules for private student loans are different.
Why Is Your Employer Garnishing Your Wages?
Garnishment can't happen unless you are in default on your student loans. "Default" for most federal student loans is defined as failure to make a payment for 270 days. Default for your particular loan might be different—you can find out your loan’s default rules by reading the promissory note that you signed when you took out your loan.
When you're in default, your loan servicer (which may be the federal government or a contractor for the federal government) can start the garnishment process with your employer. The loan servicer contacts your employer to determine your earnings.
Based on the information provided by your employer, the servicer calculates the amount that can be legally garnished from your wages, usually 15% of your disposable earnings.
You Should Receive Prior Notice and a Chance to Object
Your loan servicer is required to give you 30-days’ notice before garnishing your wages. The Notice of Intent to Garnish must include the following information about your rights:
your right to request and inspect copies of your student loan records
your right to request a hearing to present evidence that the garnishment should not be allowed, and
your right to enter into a repayment plan with the loan servicer.
Read the notice carefully. If garnishment occurred less than 30 days after the date of the notice, or if the notice does not contain the required information, that is a reason to request a hearing. If the servicer used improper procedures, the servicer will have to start over with the correct procedures.
Requesting a Hearing to Put the Garnishment on Hold
If you request a hearing within 30 days after the date of the Notice of Intent to Garnish, the garnishment is put on hold. (For some types of federal student loans, you must request a hearing within 15 days. The relevant time period should be in the garnishment notice.)
If 30 days have already passed, the garnishment will proceed. However, you can still request a hearing, and the garnishment will end if you win your hearing.
Reasons to Request a Hearing to Challenge a Student Loan Wage Garnishment
The most common reason to request a hearing is to claim that garnishment of 15% of your disposable earnings will impose a “financial hardship” on you or your dependents. Whether the garnishment would impose a financial hardship is determined according to your family size, income, and expenses.
Other reasons to request a hearing include:
You don’t owe the money (you have repaid your loan, the loan was forgiven, or any other reason that you do not owe the money).
You are currently making payments under a repayment agreement.
You have filed for bankruptcy. All collection activity must stop while a bankruptcy petition is pending.
You qualify for forgiveness, cancellation, or discharge of your loan. The Department of Education’s website provides details on many circumstances in which you could qualify for discharge. These include discharge because your school closed before you could finish your program, public service loan forgiveness, and discharge for total and permanent disability.
The Notice of Intent to Garnish should include a complete list of reasons to request a hearing. The hearing may be held in person or on the phone.
Make Sure the Garnishment Is for the Right Amount
The amount of money that a student loan servicer can garnish from your paycheck is determined using complex rules. In general, the student loan servicer can only collect 15% of your disposable income through garnishment. “Disposable income” is the income left over after paycheck deductions. If your income is very low, you might be exempt from garnishment.
If your employer is taking too much out of your paycheck, contact your loan servicer and request a correction. If necessary, request a hearing to correct the amount.
Stop Garnishment With Voluntary Payments
The goal of any loan servicer is to set up regular payments on your debt. Even if you have experienced garnishment for many months, you might be able to stop the garnishment by contacting the loan servicer to set up a payment plan.
Voluntary payments have many advantages over garnishment: You won't have collection costs added to your loan, you might be able to improve your credit rating, and you might be able to reinstate eligibility for federal student loans in the future.
]]>Is there a statute of limitations for private student loans?4578052013-11-07T19:41:20Z2023-07-27T21:50:47ZKathleen MichonQuestion
I heard that the government can collect on federal student loans forever. But I took out my student loans from a nongovernment private student loan lender.
Unfortunately, I've been in default for several years. Does the lender have to sue me by some deadline? And will it lose the right to sue me if the deadline passes?
Answer
You're correct that federal loans have no statute of limitations. But private student loans do—and state law sets the deadline.
If the lender misses that deadline, it loses the right to sue you.
What Are Private Student Loans?
Federal student loans are loans that the federal government made or guaranteed. They include Stafford loans, PLUS loans, Direct loans, and others.
Private student loans, sometimes called "private label loans," come from banks or other businesses, and aren't guaranteed by the federal government. (As of June 30, 2010, the federal government no longer guarantees student loans, it just makes them directly. But many people who took out loans prior to June 30, 2010 have federally guaranteed student loans—these don't fit within the definition of private student loans.)
What Is the Statute of Limitations for Private Student Loans?
The "statute of limitations" is a rule that sets a time limit within which a creditor may sue you for payment of a debt. The length of time that a creditor has to sue you on an unpaid debt, like a private student loan, varies from state to state. In some states, it's four years. In other states, it might be longer. To find out your state's statute of limitations for various types of debts, see Civil Statutes of Limitations.
If you're trying to determine if a statute of limitation has run, you must know when the period starts ticking. For most breach of contract actions, the limitation period starts running when the contract was first broken. That would be when you first stopped paying your student loan.
Reviving the Statute of Limitations
If you’ve defaulted on your student loan, and then you later make a payment, you might reset the clock on the statute of limitations. You might also risk reviving the time period in which the student loan creditor can sue you if you sign a new agreement to pay the debt, make a payment after the statute of limitations has run, or acknowledge your liability on the debt in some other way.
The specifics regarding when you revive a debt or reset the clock depends on state law.
What Happens if the Statute of Limitations Has Run?
If the statute of limitations has run on your private student loan debt, the creditor can ask you to voluntarily pay the debt. But it can't legally sue you, threaten to sue you, or take other actions against you to force collection of the debt.
Still, the lender might file a suit against you. In that situation, you would need to file a response (an answer to the suit) saying that the statute of limitations has expired. Talk to an attorney if you want to learn more about responding to a collections suit.
]]>Common Defenses to Student Loan Lawsuits4506802013-03-21T21:07:00Z2023-06-15T21:46:02ZAmy LoftsgordonAfter you default on a federal student loan, the lender might file a lawsuit against you seeking payment. While suits for unpaid federal student loans aren’t very common because the government has many other ways to collect outside of court, they sometimes happen.
If the lender files a lawsuit seeking payment, you might have a defense to the action, such as the debt has been discharged in bankruptcy or forgiven through a federal program. You'll have to raise any applicable defense in a formal response to the lawsuit; otherwise, you'll most likely lose the chance to get out of paying the debt.
Common Defenses to Student Loan Lawsuits
If you're sued for nonpayment of a federal student loan, you might be able to raise one or more of the following defenses, among others.
You Never Agreed to Pay the Debt
If you're a victim of identity theft and didn’t take out the loan you’re being sued over, you can raise this as a defense in your answer to the suit.
In addition to filing a response to the suit, go to IdentityTheft.gov to create an Identity Theft Report. Next, file a report with your local police. Keep a copy of the report for your records. And contact the U.S. Department of Education Office of Inspector General Hotline at 800-MIS-USED (800-647-8733).
Also, be sure to review your credit reports to look for further signs of identity theft.
You Made Payments, But They Weren’t Credited to the Account
Sometimes, loan servicers mess up when processing payments, like by inadvertently applying them to another borrower’s account.
The Lender Miscalculated the Amount Due
In the suit, the lender might ask for attorneys’ fees or collection costs that are too high or that the law doesn’t allow. Or the lender might be asking the court for more than you agreed to pay.
The Debt Has Been Discharged In Bankruptcy
Most student loan borrowers can’t discharge (wipe out) their student loan debt in Chapter 7 or Chapter 13 bankruptcy. But if you can prove that repaying your student loans would cause an undue hardship to you, you can get rid of your student loans this way.
Your Loan was Discharged, Forgiven, or Canceled Through a Federal Program
Under specific circumstances, like if your school closed or you’re disabled, you might be able to discharge your loan. Generally, only federal student loans—not private ones—may be discharged.
If the lender or loan servicer has already approved your discharge request at the time of the lawsuit, provide supporting documentation in your response to the suit. If your discharge request is still pending at the time of the suit, state that fact in your response to the lawsuit and provide supporting documentation. Some defenses you can raise in court, like “defense to repayment,” are similar to the reasons for justifying a discharge through a federal program (outside of court). (With a defense to repayment argument, for example, you argue that your federal student loans should be discharged due to school misconduct, like fraud.) If you haven’t applied for a discharge yet, you can ask the court to delay your case while you apply and the discharge is pending.
Talk to a Lawyer
Generally, you shouldn’t ignore a debt collection lawsuit. But in some circumstances, you might not want to respond to a suit. If you agree that you owe the amount claimed in the suit, including interest and fees, and you’re judgment proof—and your financial situation won’t change—it might make sense to let the creditor get a default judgment (an automatic win) instead of paying attorneys’ fees and court filing fees to answer the suit. However, talk to an attorney before you determine this is the best route to take.
Being judgment proof is, in some cases, only a temporary condition. So, if a creditor sues you and you believe you’re judgment proof, it’s often a good idea to respond to the lawsuit anyway. You might have a valid defense to the suit. Also, judgments are valid for a very long time and can be renewed. If your financial circumstances might improve in the future, the creditor could be able to collect at that time.
If you're facing a student loan lawsuit and need information about possible defenses or help responding to the suit, talk to a debt relief attorney who deals with student loans.
]]>Collection Methods Used by Private Student Loan Lenders4506012013-03-27T21:19:12Z2022-02-03T17:50:00ZAmy LoftsgordonIf you're in default—behind on your payments—on a private student loan, the lender will likely come after you for the money. The collection methods and tools available to private student loan lenders are very different from the methods and tools available to federal student loan lenders. Borrowers need to know which tools private student loan lenders can (and can't) use.
Also, before you go into default, learn what repayment options are available. You might be able to avoid falling behind in the first place.
Do You Have a Private Student Loan or a Federal Student Loan?
Students may take out more than one loan, and the various loans might be different types. If a lender or debt collector is trying to collect on a student loan, your first step should be to determine what kind of loan is at issue.
For federal student loans, visit the National Student Loan Data System, which is the Department of Education’s central database for student aid. You can get information about what kind of loan you have, as well as loan or grant amounts, outstanding balances, loan status, and disbursements. You can also go here to find information about your federal student loans and to get contact information for the loan servicer or holder for your loans.
To find out if you have private student loans and get information about them, check your loan documents.
You Must Be in Default
A private student loan lender can't start collection activities on your loan unless you're in default. For federal student loans, “default” is defined by federal laws. For private student loans, “default” is defined in your loan contract.
You should have received paperwork when you took out your loan, which included all of the terms between you and your lender. If you don't have the loan contract, contact your lender to get a copy. Every loan contract is different, but common triggers for default are:
you didn't make a payment on time
you filed for bankruptcy, or
you're insolvent.
Collection Methods If the Lender Doesn't Have a Judgment
Unlike federal student loan lenders, private lenders must go to court to get a money judgment against you before using collection tools, like garnishment. (Money judgments are explained in more detail below.) Private student loan lenders usually attempt out-of-court collection before going to court. Most private lenders will hire a third-party debt collector to contact you and try to collect the debt.
Lenders or debt collectors usually attempt to collect a defaulted student loan by sending collection letters and calling you.
Limits on Debt Collector Tactics
Debt collectors are limited in how far they can go in trying to get you to pay up. The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using deceptive, abusive, or harassing tactics to collect debts. The FDCPA places limits on collector communications and, among other things, prohibits false representations, such as claiming that the lender has legal rights that it does not have. For example, a debt collector can't claim that a private student loan lender can seize disability benefits or tax refunds. Those actions are only available in collections on a federal student loan.
Arranging for a Payment Plan
Depending on the terms of your loan contract, you might have to pay the reasonable costs of debt collection activities. If that's the case, and you don't dispute your debt, you might want to contact the lender and attempt to establish a payment plan that you can afford.
Unfortunately, many borrowers with private student loans have had difficulty communicating with private student loan lenders about modifying loan terms or establishing payment plans. The Consumer Financial Protection Bureau (CFPB) website offers assistance in communicating with your lender.
When the Lender Sues You
If a private student loan lender wants to use additional collection tools such as garnishment, the lender must file a lawsuit against you in court and get a money judgment. The lender needs to prove to a judge that:
it holds a promissory note for the loan amount
you signed the promissory note, and
you're in default on the note.
Methods of Collecting on a Money Judgment
Once the student loan lender gets a money judgment, it can use various collection methods to get the money from you. These methods include:
garnishing your wages
placing liens on your personal property and real estate, and
Each state has rules governing the procedures for post-judgment collection. States also have laws that protect certain types of property from collection—these are called exemptions.
Repayment Options for Private Student Loans
Before you go into default on your private student loans, look into options for repaying them. Which options you’ll get, if any, depends on the terms of your loan agreement, your lender, and to some extent the law.
Get a Copy of Your Loan Agreement
Before you do anything else, get a copy of your loan agreement. Private loan terms vary widely. If you don't have a copy of your loan agreement, call your servicer and ask for one. Read the contract to determine if it includes repayment options.
Under the terms of the agreement—or based on the lender’s policies or the law—you might be eligible for one or more of the following options.
Interest deferment. Most private loan agreements include an in-school interest deferment option. So, you can choose to pay the interest as it accrues while you’re in school, or you can put off paying it and capitalize the accrued interest when you enter repayment. (“Capitalizing” the interest means adding it to the outstanding loan amount.)
Forbearance options. You might be eligible to enter into a forbearance for three to nine months. With a forbearance, the lender allows you to stop making payments or pay a lesser amount for a specific amount of time. Lenders used to grant forbearance more liberally, but the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued guidance that forbearances beyond nine months are inappropriate for private student loans.
Modifications and workouts. Private student loan lenders have more flexibility than federal student loan servicers to rework your loan. This flexibility is partly because a borrower can refinance at any time with another private lender and partly because private loans aren’t subject to Department of Education regulations restricting what the lender can accept. The FDIC and OCC allow lenders to offer loan modifications, workout plans, and temporary interest rate reductions for private student loans. For example, lenders can permanently modify the principal, interest, or term length on private student loans. Lenders can allow you to make up missing payments over time without permanently modifying the loan. Some lenders will reduce the interest rate, making it easier for you to catch up on payments. Private student loan lenders determine each of these options on a case-by-case basis.
Refinance with Another Lender
If you’re not in default, you might be able to refinance. Private student loans were popular before the 2008 financial crisis. As default rates increased, most financial institutions stopped lending to students. Since 2014, though, private student loan lenders are once again offering loans and various refinance options. The terms of these loans vary widely, so it’s best to shop around. If you have good credit and income, you could qualify for a lower interest rate or an extended term. If you’re in default, you’ll need a creditworthy cosigner to refinance.
Cancellation
While you can cancel federal student loans under certain circumstances, private student loan lenders rarely cancel loans. But in the event of death or permanent disability of the student, it can happen. To find out about cancellation options, contact the servicer to determine if it has a death or disability cancellation policy, especially if the borrower qualifies for a death or disability discharge of a federal loan.
Also, it’s rare but possible to discharge (eliminate) student loans in bankruptcy.
Consider Defenses to Repayment
Even if the debt is valid, you might have a claim or defense that prevents the lender from recovering the full amount of the debt. Borrowers have rights under the Truth in Lending Act (TILA) against private student loan lenders that don’t apply to federal loans. The statute of limitations is only one year. So, you have a limited time to sue if your lender violates this law.
What School Did You Attend?
The Consumer Financial Protection Bureau has sued several for-profit schools in the last few years based on Truth in Lending, unfair and deceptive practices, and Fair Debt Collection Practices Act claims relating to private student loans. These schools are:
If you attended one of these schools and have a private loan, you should have been notified about these actions and the status of your loans. If you haven’t been contacted, you should look into these matters. You shouldn’t refinance any loans from any of these institutions until you know that the debt is valid and enforceable.
Getting Help
To find out more about available repayment options for your private student loans, ask your servicer.
If you're served with a complaint (lawsuit) that seeks a money judgment against you, it's a good idea to consult a lawyer. The rules for these types of lawsuits vary by state, and it's important that a lender show all of the required evidence when seeking a money judgment.
If you need help understanding a private student loan agreement, want assistance negotiating a workout or settlement with a private student loan lender, or are having trouble getting a straight answer from your loan servicer about your available options, consider consulting with a student loan attorney or debt settlement attorney who deals with student loans.