As the economy slowly builds back up, there is still an astonishing number of people in the U.S. who are struggling to make ends meet – which means student loan payments are getting pushed to the side. Now the government is taking action. In a New York Times article released this week it has emerged that the government is sending debt collectors after defaulted student loan borrowers. Between this and the fact that there is no statute of limitations on collecting federally guaranteed student loans, it is now impossible to escape repayment of some sort. Now is the time for everyone to be aware of their options so they can avoid defaulting at all costs.
What Happens If You Default?
There are very serious risks to student loan default, now more than ever. First of all, your credit score will take a hit – which affects your ability to obtain work and, later on, buy a house or car. Now that the government is sending collectors after defaulted borrowers, the risks are even greater. Any money you receive from the government (ie tax returns, social security benefits, etc.) can be taken away to be put towards the loans. And anyone who’s in default should be ready for an onslaught of phone calls from collectors – which is both annoying and can rack up your phone bill.
The Good News! Things You Can Do to Avoid Default
There is good news, although this may be the first time you’ve heard about it. The government has put in place several payment plans to help people in a variety of situations pay their loans. Read these payment plans carefully to find the one that works best for you:
- Standard Repayment Plan – Payments are a fixed amount each month and the loan must be paid off within 10 years. Ideal for those in good standing with their loans who don’t want a long repayment period.
- Graduated Repayment Plan – Payments start low and go up every few years, with the loan to be paid off in 10-30 years, depending on the amount you owe. Beneficial to those who are having trouble finding work right out of college, but expect things to improve once they land their first job (and thus increase their chances for higher pay down the road).
- Extended Repayment Plan – Payments can be fixed or graduated, with the loan to be paid off over 12-25 years (available to those who owe more than $30,000). Good for those who are more concerned with having lower payments than having a loan with a short life span.
- Income Contingent Repayment Plan (ICR) – Payments depend on your income, loan amount, and family size, and the loan must be paid off in 25 years (any remaining balance after 25 years can be forgiven). Good for those who need to lower their payments and have a family to support.
- Income Based Repayment Plan (IBR) – Payment is capped at 15% of your disposable income and the loan must be paid off in 25 years. This option is only available to those who can prove partial financial hardship (any remaining balance after 25 years can be forgiven). Beneficial to those who are seriously struggling to make monthly loan payments.
Finally, if you’re struggling so much that you can’t make any payments at all, don’t forget that there are deferment and forbearance options for those who are unemployed, in the military, or experiencing economic hardship. Call your loan providers to find out if you’re eligible.
Education is Key
With all the options available for students to pay back their loans, how is it that so many are still defaulting? Lack of knowledge and arduous paperwork requirements for these programs (specifically ICR and IBR) are the main causes. That’s why we’re discussing the options for you here.
These programs can’t help people who don’t know about them and, even after enrollment, it can be difficult to stay on top of the paperwork. But the benefits are truly too great to pass up. Communicate with your loan providers to find out what you’re eligible for. While the long phone calls and paperwork are a hassle, avoiding default and all that it entails will be more than worth it in the end. And finally, if you know of anyone who needs help, please share this with them so they see what options they have.
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