However, the reverse can also work to the borrower’s benefit.  While it is not something most borrowers want to think about, prepaying on their loans, even a small amount, can have a huge benefit in the long run.  We need to get the borrowers to focus on their long term benefit.

 

Based on $20,000 in student loan debt @ 6.8% interest, standard repayment plan, by paying an additional $1 per day, the borrower could save:

 

 

Note: the total amount saved includes the amount the borrower will not have to pay over the 1.5 and 2.7 years – in other words money they have freed up for other family purchases.)

 

 

 

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DEFAULT:  The entire focus of student loan debt management is to provide the borrower with the tool necessary to avoid defaulting on their federal student loans.   If a borrower does not make a payment for 269 days, their loans are eligible for default on the 270 day (that’s 9 months of missed payments).  Of course the borrower may also apply for a deferment or forbearance to stop the loans’ delinquency.  Once the loans have been declared in default, the consequences are long lasting and severe.  They include, but are not limited to:

Wages may be garnished – allowing a withholding of up to 15% of the borrower’s take home pay of disposable  pay.

 

A portion of your Federal wages or benefits (for example, SS benefit) may be withheld.

 

State and Federal tax refunds will be seized and applied to the outstanding loan balance.

 

The balance accelerates and becomes due in full.

 

The account will be turned over to a collection agency.

 

The default will be reported to the national credit reporting agencies, and remain for a minimum of 7 years.

 

Title IV rights are lost, meaning no additional student loans, loss of deferment and access to repayment plans.

 

Subsidized interest benefits will be forfeited.

 

Benefits offered under the FFELP program will be lost.

 

Professional licenses may  be  revoked or not renewed.

 

Collection fees may add up 25% of the original principle balance

 

The borrower may be sued for the entire balance of the loan (including the accrued interest & penalties).

 

The borrower will be liable for collection fees, attorney fees and court costs.

 

The borrower may be prohibited from enlisting in the Armed Forces.

 

The borrower will lose or may be denied security clearance.

 

Defaulted student loans may be resolved through consolidation or rehabilitation.  The borrower should check with the department of education to see if their loans are eligible for consolidation.  A borrower may be required to make consecutive payments within designated time frames in order to apply for consolidation to relieve a default.  Using consolidation two results defaulted student loans is the quickest way to remove the loans from default; however, the defaulted loans will remain on the borrower’s credit report.

 

Rehabilitation: generally considered to be the better solution for borrowers to resolve defaulted loans, rehabilitation offers two different options to the borrower and the option selected would depend on the borrower’s situation and future credit plans.  Regardless of the rehab option selected, the borrower has only one chance to complete the program.  If the borrower misses a payment (or more than 1 payment under full rehab), they will lose their rehabilitation options and the default will remain in place.  So it is very important that the borrower understand what they are committing to before agreeing to their monthly rehab payment amount. Let’s look at full rehabilitation first.

 

Full Rehabilitation offers the borrower a chance to actually have the defaulted loans removed from the borrower’s credit report.  This can mean a huge difference in future purchases, including interest rates paid on cars, mortgages, etc.  It is by far the best option for the borrower but will take up to a year to complete the program and have the default removed.  IN order to qualify, the borrower must make a voluntary, full payment on time for 9 out of 10 months.  In this case, the payment is defined as on time if the payment is made within 20 days of the due date on Direct or FFELP loans and 15 days on a Perkins loan.  Once this condition has been met, then the borrower’s loans will be sold to a new lender, a process that can take an additional 90 days.  The borrower must maintain on time payment during this time as well.  So, in reality, the borrower must be prepared to make on time payments for 12 months and should keep this in mind when they are negotiating their monthly payment.  It is a long time, but the benefits are worth it – a defaulted student loan is one of the few, if only, credit mistakes a borrower can erase from their credit reports.

 

Six month Rehabilitation of student loans.  Some borrowers elect to go for the shorter program.  If a borrower makes 6 consecutive, voluntary, on time payments, they can regain their Title IV rights.  For this program the term on time means the payment was received within  15 days of the due date.  If they are meeting the 15 day term, the borrower can actually qualify for the 6 month program and continue on to complete the full rehabilitation, as long as they continue to make their payments in full and on timely basis.

 

Loan Discharge: Student loans may be discharged in the event of the borrower’s death.  In order to have the loans discharged, a family member or other representative must present a certified copy  of the death certificate.  PLUS loans may also be discharged in the event of the death of the student the loans were obtained to assist or in the event of the parent’s own death.  Again, in either case a certified copy of the death certificate must be obtained.

 

Public Service Loan Forgiveness:  available for Direct Loan borrowers whose loans were disbursed after October 1, 2007 and who are participating under the IBR, Pay as You Earn or ICR plans.  Under this program, once the borrower has made 120 qualifying payments (which may be as low as a $0 payment, based on their calculated monthly payment amount), the borrower may request the balance be forgiven.  There are many additional qualifications for the program and a borrower should visit http://studentaid.ed.gov/sites/default/files/public-service-loan-forgiveness.pdf for more details.

 

Total and Permanent Disability may also result in the loans being canceled.  The required documentation is very specific and many borrowers are denied due to technicalities.  In general, borrowers should contact their servicer to obtain the discharge package prior to beginning the process and the borrower must obtain one of the following as proof of disability:

Documentation from the Department of Veteran Affairs, showing the borrower is unemployable to a service related injury.

A copy of notice of award from the Social Security Administration, showing the borrower is receiving benefits and will  have their next disability review within 5 to 7 years of the most recent determination.

A personal physician may certify the borrower as being totally and permanently disabled due to a medical or mental condition that prevents the borrower from engaging in any gainful activity, certifying that

the condition  can be expected to result in death has lasted for a period of not less than 60 months will continue to last for the next continuous 60 months Borrowers teaching in a low-income elementary or secondary school may qualify for Teacher Loan Forgiveness if their loans were obtained after October 1, 1998 and if they have taught for five consecutive years.  The program allows for up to $17,500 forgiveness on subsidized or unsubsidized loans.  For more information and qualification specifics, the borrower should visit Teacher Loan Forgiveness.

 

Since its beginning in 2007, the Public Service Loan Forgiveness has become extremely popular.  The borrower’s loans must be from the Direct Loan program (note borrowers from the FFELP program may consolidate to Direct in order to qualify) and loans must be dated on or after October 1, 2007.  The borrower must also have made 120 consecutive payments before applying to have their remaining balance forgiven.  Obviously, if the borrower has paid on a standard repayment plan, then they would not have a balance remaining;  however, borrowers repaying using an income based repayment plan may have payments as low as $0, so they may substantially benefit from this program.   For more information, borrowers should visit Public Service Loan Forgiveness.

 

Student loans may also be discharged:

in the event of school closing while attending or within 90 days after withdrawing from the school

False certification or unauthorized payment Unpaid Refund

 

Perkins Loans offer their own discharge and cancellation programs, focusing on service performance.  There is no standard cancellation form, so the borrower must contact their school for detailed information.  In general, depending on the type of loan and the type of service performed, a borrower may have all or part of their loan canceled if they served in one of the following areas:

 

Peace Corp or ACTION program volunteer

Teacher

Member of the armed services, serving in area of hostilities

Nurses or Medical Technicians

Law Enforcement or Correction Officers

Head Start Worker

Child or family services worker

Professional provider of early intervention services