Student Loan Debt Default Versus Student Loan Forgiveness
If you’re thinking you can settle your student loan debt for 40% to 60% less than what you currently owe, think again. Student loans are nearly impossible to discharge in bankruptcy and therefore just as difficult to settle. If you’ve defaulted on your student loans, your best option is to figure out how to get caught up. Otherwise, you could be sued for the debt.
Student loan default happens after you’ve fallen behind on your student loan payments. The default goes on your credit report and will stay there for up to seven years. You’ll likely have a hard time getting approved for other credit cards and loans as long as your student loans remain in default.
After a student loan default, you may realize the government is bigger than you think. Defaulting on federal student loans could result in having your tax refunds taken by the IRS. Yes, these government agencies may work together to collect your student loan payment.
The government can take more than just your tax refunds. They could garnish your wages or levy your bank account and may not even have to go through the court system to do it. Part of your Social Security benefits could also be taken to pay back your student loans.
Once a home has been foreclosed, it’s almost always foreclosed. Once a vehicle has been repossessed, it’s usually repossessed forever. Student loan default doesn’t work the same way. You can get out of a student loan default status by catching up on your payments, but you generally have to make the catch up payment on your own, not through garnishments.
As your finances improve and you’re able to consistently make your payments each month, contact your lender to talk about your options. They could put you on a rehabilitation program that will take you out of default status after you make 9 consecutive payments. The good news is that the default status will likely also be taken off your credit report.
This is the rehabilitation process for federal student loans. You may have to take some different steps to rehabilitate student loans from private lenders. Each lender may have different requirements for rehabilitating your loans, so you’ll have to talk to your lender about the steps you must take to get your loans back in good standing.
Consolidation may be an option for dealing with student loans you can’t afford to repay. Through consolidation, you may be able to lower your interest rate or lengthen the repayment period so that your payments are reduced and the loan is more affordable.
You have to be careful about how you consolidate loans that have already defaulted. If you don’t talk to the lender before the consolidation happens, your old loan may continue to be reported with a “default” status because you technically didn’t bring it out of default before you paid it off. If you have control over the way the consolidation happens, try to get the default status taken care of first. That may mean paying your account for several months before you consolidate.
One of the greatest opportunities for stressed out college graduates is student “loan forgiveness” or “loan repayment” programs. These programs offer to eliminate some or all of your student loans in return for choosing certain careers, military service, and even volunteer work.
Such programs can eliminate anywhere from a few thousand dollars to over $100,000 of student loans. Ironically, many of these programs receive a relatively small number of applications indicating that many graduates are completely unaware of these opportunities.
Student loan forgiveness programs are those backed by the Federal government and cover loans issued through Federal programs such as Stafford and Perkins Loans. When you participate in one of these programs, portions of your debt are literally “erased” from your lender’s books.
Student loan repayment programs, which are more widespread than forgiveness programs, may be used to eliminate any type of loan including private loans. Under these programs, you either receive additional funds that you can use to pay down your loan, or a payment is made directly to your lender by your employer.
The amount eliminated under loan forgiveness or repayment programs may be considered taxable income in the year received. In other words, if you have $5,000 in loans forgiven next year, that may increase your taxable income in the eyes of the IRS by an equivalent amount. While that’s never fun, it shouldn’t discourage you from using one of these programs since the benefit far outweighs the cost.
To avoid having your student loan forgiveness or employer repayments be subject to taxation, your student loan must specifically include provisions allowing it to be forgiven. These provisions must require you to work within certain professions, for certain employers, for a specified minimum amount of time.
Additionally, any loan repayments made under the National Health Services Corps (NHSC) Repayment Program or any state program eligible for funds from the Public Health Services Act are considered tax-free.
Tags: Credit Report, Federal Student Loans, IRS, Loan Forgiveness, National Health Services Corps Repayment Program, NHSC, Perkins Loans, Social Security, Stafford Loans, Student Loan Debt, Student Loan Default, Student Loan Forgiveness