Student loan default can be super frustrating to manage. If you want to know where to get started to get out of default, this post is for you. Estimated read time ~ 5 minutes, estimated watch time at 1.5x ~ 3 minutes.
Student loans enter default when a borrower hasn’t made the minimum monthly payments for 270 days.
Step 1: Find out who holds your student loans
When your student loans are in default your federal student loan servicer still owns your loans. However they may have turned over the responsibility for collecting payment to a collections company. Typically the longer your student loans have been in default the more likely it is you’ll have to work directly with a collections company.
The best place to look at who holds your loans currently is the National Student Loan Data System (NSLDS). Typically the company name is listed as a hyperlink that you can click to find contact information.
Step 2: Contact your loan servicer or the collection agency.
When you find out who to contact, contact them. The first step in getting out of default is to get in touch with whoever is going to determine your repayment plan and get started.
Step 3: Provide necessary information and fill out necessary paperwork.
In order to set up your new repayment plan the company you’re working with is going to need a lot of information. This information includes sensitive stuff like income information. So you want to make sure the company you’re dealing with is legitimate. There are a lot of scammers preying on the desperation of borrowers with defaulted student loans.
You can always make sure you’re working with someone legitimate by contacting the Default Resolution Group at the Dept of Ed.
Step 4: Be persistent and keep at it! You can do it!
Collections companies are often difficult to work with. Keep your head up and don’t be discouraged. It takes time to get into student loan default and it takes time to get back out. Keep working at it until you have a repayment strategy you can afford.
Next week I’ll talk about whether you should consolidate or rehabilitate your student loan default and discuss the pro’s and con’s of each.
Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.
I have twins that have two more years of college. I’m thinking of taking out a home equity loan. Is this the best way to pay for their college or should I look at Direct student loans?
Deciding which loan type, private or federal, works best to pay for your children’s education comes down to two main thoughts. The first is interest, ideally you would pick the loan option with the lowest fixed interest rate. The second concern is benefits, if you qualify for and are interested in Public Service Loan Forgiveness (PSLF) you would want to consider a federal student loan.
Let’s talk through both choices.
Direct Parent PLUS Loans:
A Parent PLUS loan is the federal student loan option you have available as a parent. Parent PLUS loans will remain in your name until they’re repaid. Your twins won’t be able to consolidate this loan with any of their own federal student loans to transfer ownership. You would take out separate parent PLUS loans for each child.
The benefit of a Parent PLUS loan is that you can be eligible for certain federal student loan benefits like income-driven repayment plans and loan forgiveness. However, Parent PLUS interest rates are pretty high (in 2017-2018 interest rates were 7%).
Private Loans:
If you’re able to secure a home equity loan or an alternative line of credit for a lower fixed interest rate than the Parent PLUS loans this might be a better choice. The main thing to ensure is that you are able to afford the monthly payments on any private line of credit you obtain. There are no repayment benefits and no forgiveness options for these private lines of credit, which is just fine as long as you can afford payments.
A few general things to consider about borrowing to pay for your children’s education:
– If your children can get Direct subsidized loans for their undergraduate degree, those typically have a lower interest rate and don’t accrue interest while they’re enrolled in courses.
– It’s important to consider the ability to borrower for any future children. If you borrow for the twins will you be able to borrow for other children in your family?
– Does borrowing for college education impact your ability to manage your own debt (mortgage, credit card, auto, etc)? Does borrowing impact your ability to save for retirement?
Have you read the example about an orthodontist with over $1 million in federal student loan debt? The situation seems totally preposterous and unimaginable.
Estimated read time ~ 10 minutes Estimated watch time at 1.5X about 5 minutes 30 seconds.
The gist of the Wall Street Journal article is that an orthodontist borrowed federal student loans to the tune of $600,000 to pay for his education at USC. He’s now repaying that debt under an income-driven repayment plan and his monthly payments don’t keep up with interest. So his loan balance continues to grow every single month and is currently over $1 million. After 25 years of income-driven repayment the loan balance is projected to be over $2 million.
A series of problems with funding for higher education contribute to this unimaginable student loan situation. While not common currently, there are 101 borrowers with balances of at least $1 million, if we don’t approach funding higher education and student loan debt in a new way we’re going to see these >$1 million cases more frequently.
Before you brush this off as an impossible scenario created solely by the irresponsibility of a few borrowers, here’s a rundown of how this super debt happens.
Inelastic Demand
Federal student loans are directly correlated with the price of tuition and fees at universities where students can use federal student loans to fund their education. As more funding is available, tuition and fees increase. In other markets an increase in price would presumably lead to a decrease in demand. But that’s not the case with higher education.
Despite tuition hikes, students continue to demand education at the same rate. The demand for education is inelastic, not based on price, because students have access to as many student loans as necessary to fund their tuition. Colleges and universities realize this and continue to raise tuition and fees accordingly.
Perpetual Tuition Hikes
College tuition has increased at a rate well above inflation for the past few decades. In constant 2013 dollars, tuition and fees at a four year public university were $2,147 in 1980 and nearly quadrupled to $8,070 in 2013 (NCES Table 330.10). In 30 years the rise of tuition and fees exceeded the rate of inflation by almost 400%.
When parents and students estimate the cost of attending college it’s wise to factor in tuition hikes of at least 5% annually.
Reduced State Funding
Why are colleges raising tuition and fees at such exorbitant rates? One factor is a reduction in state funding of public universities. Public universities obtain their funding from both federal and state sources. State funding is primarily in the form of grants and other funds that can be used for general appropriations (keeping the lights on, paying staff, new construction, etc) while federal funding is primarily in the form of student loans.
In 1980 public universities received the majority of their funding from the state, today the balance has flipped and they now recieve the majority of their funding from federal sources. That means, in order to continue funding general appropriations at the same level, colleges pass the loss of funding on to borrowers. Borrowers have more access to student loans so borrowers are the ones footing the immediate bill for state budget cuts.
High Paying, High Cost Professional Degrees
This seems like an oxymoron, the best paying careers are contributing to the problem of super debt. But it’s true. Degrees that tend to pay a lot on the back end tend to cost a lot on the front end. The colleges offering these degrees will often assure borrowers that they’ll make “good money” and be able to easily repay their student loan debt after graduation. These fields pay well, but without loan forgiveness no W2 employment pays well enough that a borrower can repay a million dollars in student loan debt.
When someone goes to medical school they’re on a long road. First, they have four years of an undergraduate degree to pay for, next they have four years of medical school. Medical school is where it gets expensive, even if you attend a public in-state university you’re looking at a price tag of over $150,000 for tuition and fees plus cost of living on top. After graduation, specialization requires residency and fellowship which can take another five years to complete. If the borrower decides to enter forbearance to avoid struggling to make payments on their student loans while making a resident stipend the interest can get out of hand quickly.
High Interest Rates
Interest rates are the next major contributor to super debt. Borrowers only have access to a maximum of $23,000 in subsidized federal student loans. That means any loans over that amount are in the form of unsubsidized loans which start accruing interest immediately. Interest rates for unsubsidzed loans are typically between 6-7%.
That means while students are still taking out student loans they’re immediately accruing thousands of dollars of interest. IF this interest is left to compound for the years of education and residency required in specialty fields the balance quickly becomes unmanageable. Then when high debt borrowers enroll in an income-driven repayment plan, the monthly payment doesn’t keep up with interest and the loan amount continues to rise. Leaving huge amounts of student loans to be forgiven after the borrower has made payments for 20-25 years.
Inefficient use of Taxpayer Dollars
Ultimately we have a system that is inefficiently using tax payer dollars. Rather than fund our public universities up front and pay the immediate costs (translating to lower tuition for borrowers and lower loan amount) we use taxpayer money to forgive debt that has been accruing 7% interest for years.
The most efficient use of taxpayer money is to reduce the cost of college by adequately funding their operating expenses instead of waiting to pay for college education via loan forgiveness because the cost of the borrower’s education is much more than their high paying career can afford to repay.
Ultimately, tax payers are going to pay for higher education one way or another. Whether it’s forgiving super student loans or providing funding for universities up front. It makes sense to advocate for up front application of our tax dollars to reduce up front costs and get our money’s worth out of that spending.
Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.
I am trying to figure out how to balance living and enjoying life now while seeing my student loans as my “mortgage” or deciding to refinance and trying to pay off as much as possible. Is there some middle ground? I don’t want to sacrifice my life now as there is NO guarantee for the future. Do you have any advice on how to evaluate the best move so I can balance the importance of paying off debt but also enjoy life?
This is such a great question and it requires a ton of unpacking! The repayment strategy that fits best with your life is one that meets both your financial goals and your life goals. It can be tough to strike a perfect balance but here are some tips that every borrower can apply.
1. Make an active decision about your repayment strategy.
It often feels like student loan debt is looming over you and try as you might to ignore it, student loan debt nags at your consciousness. If your student loan debt is hanging over you it can often help to make an active decision about your repayment strategy. That means taking a good look at what you want for yourself financially and what you want for your life and finding a strategy that helps you balance those desires. I’ve often seen borrowers who get a lot of relief just from examining their situation and making an active choice, whether that’s repaying student loans slowly and over a long time like a mortgage or repaying student loans aggressively and sacrificing in the short term.
2. Figure out how much an aggressive repayment strategy would cost you each month and what you would have to sacrifice.
If you’re considering repaying aggressively (by refinancing or making extra monthly payments), a good first step is to simply figure out what aggressive monthly payments would look like and see how much that would actually impact your quality of life. You may be surprised to see that although aggressive repayment would require financial sacrifice, you don’t have to sacrifice as much as you thought and that you can still afford to do the most important things that enrich your life.
3. Make sure your financial house is in order before tackling student loan debt aggressively.
Aggressive repayment is just that, aggressive. That means there’s not a lot of margin for error on your part, so you want to have your ducks in a row. You need to have an emergency fund with at least three months expenses. You need to be contributing enough to your employer-sponsored retirement (if you have one) to get the full employer match. If you don’t have an employer-sponsored retirement you need to be contributing to an IRA. If you’re not able to afford to do these things, then I would advise against aggressive repayment.
Last week’s article discussed the normal cycle of motivation while repaying your student loans. If you’re looking to ramp up your motivation, today’s post will give you a few hacks to get from where you are to where you want to be. I’ll also share my journey through the stages of motivation.
Estimated read time ~ 8 min. Estimated watch time at 1.5x speed ~ 5 minutes
Hack#1
Pursue your curiosity and allow yourself to learn information without being obligated to take action.
Early on, borrowers often feel a huge weight of indecision. There’s too much information out there and it seems impossible to make a choice. By approaching learning with a sense of curiosity and no obligation to take action, you can look into the stuff you’ve been wondering about and start to learn and piece together the world of student loan debt. When you remove the pressure of action you aren’t crippled by the possibility of making an incorrect choice, because you’re not making a choice, you’re simply gathering information.
Hack#2
Make a decision about what you’re going to do with your student loans.
Once you’ve started collecting information you’re in the preparation phase. In order to move into the action phase a decision needs to be made. You’ll have to decide what exactly it is you want to do with your student loans.
If you don’t know what you want to do with your student loans, it’s going to be tough to take actions that land you in an ideal repayment situation. It’s OK to have one or two different options that you can start taking actions on. Your actions on both will help you move toward either choice and may help you finally decide which one is best.
Hack#3
Develop a plan that you can financially sustain and consistently work toward for the long term.
In order to have an action to maintain until you achieve your goal, you need to be able to sustain it. If your repayment goal is too aggressive, an emergency may arise and you won’t have the cash flow you need to both pay your student loans and deal with the emergency. If you make a misstep early on because your plan was too aggressive, you may lose motivation to work toward your goal entirely. That can leave you feeling unmotivated to sustain your repayment plan. You can always increase the intensity of your goal later if you find you’ve got a lot of room in your budget.
My Student Loan Motivation Journey
During College
While I was in college I wasn’t particularly motivated to worry about repaying my student loan debt. I worried enough that I worked two jobs, applied for scholarships, and borrowed only for tuition and fees but I didn’t worry enough to check my student loan balance regularly or think about the interest accumulating on my unsubsidized loans.
Immediately After Graduation
When I graduated college I became a pharmacy resident which meant instead of a six figure salary I was looking at a salary that was less than half of that. I was motivated to make payments and figure out a repayment strategy because at this point I realized I had accumulated $10,000 of interest on my unsubsidized student loans while I was in school.
Although I could enter forbearance and not make payments because I was in residency I didn’t want to do that because I would still accrue interest, and at an average interest rate of 6.5% for $128,000 that interest would accumulate fast. I had originally picked a 10 year standard repayment plan but discovered those payments were $1500 per month and I couldn’t afford to pay that much with my resident salary. I enrolled in the income-based repayment plan and paid about $380 each month and paid extra when I could afford to. That year I paid $6,000 on my student loans but that wasn’t enough to keep up with interest and my loan balance crept up to $132,000.
After Residency
When I was finally making full-time pharmacist salary I knew I had to tackle these loans quickly. The rate of interest accumulation was staggering, and I would dig myself into a deep hole quickly if I didn’t repay aggressively. So that’s what I did, I changed my repayment plan back to the 10 year standard plan and paid extra. My first year I paid over $28,000 toward my student loans, but then I had an unwelcome surprise.
I paid almost $14,000 in interest and couldn’t deduct any of it on my income taxes. I was really mad because the government was taking my money twice. I was being taxed on my earned income and then paying interest on my federal student loans. Then I discovered refinancing, halved my interest rate, and entered a 5 year repayment plan.
After Refinancing
After I refinanced my student loans I had an initial flood of motivation. My monthly payment was $1345 and my goal was to spend at least $3,000 a month on my student loans. However, I also realized I wanted to travel and I had the cash flow to do it if I just didn’t make an extra payment on my student loans that month.
So for a couple years I went on skipping extra payments and averaged paying about $2,000 a month toward my student loans. It’s not that this was terrible, but I wasn’t exactly meeting my goal.
Today I’m going to be out of student loan debt by September 2019, if I could be more aggressive it’d be awesome to be out before my 30th birthday (August 2019), but we’ll have to see about that. Because the end is so close for me I’m incredibly motivated again and I can almost taste the freedom from my student loan debt. I’ve been paying at least $3,000 per month on my student loans since January 2018 and I don’t let myself off the hook for making those payments.
Today, I owe just over $48,000 on my student loans. My motivation to get rid of that debt is here to stay until it’s gone.
What’s your student loan motivation journey? Have you had up’s and downs? What stage are you currently at? Let me know in the comments below or on the Repayable Facebook Page.
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