Avoiding Federal Default

Michael Lux Blog, Student Loans 0 Comments

Looking through some Department of Education statistics, I came across one very disturbing number… Over one in seven recent graduates are in default on their federal student loans.  Specifically, when you look at how the class of 2010 performed on repaying their student loans, 14.7% are in default.

The sad part of this whole situation is that so few entering college students consider the possibility of not being able to pay back their student loans.  Nobody goes to college thinking they will be unemployed or underemployed, yet it happens to countless students.  People don’t start school and expect to never finish, but in reality, it happens.

Falling behind

14.7% of students may not seem like a huge number, but considering the consequences of going into default, even 1% would seem far too large.

People who fall behind on their student loans deal with the constant stress of creditors who are never satisfied.  Going into default can result in wages being garnished.  Federal default can mean that the government keeps your tax refund each year.

Worse yet, it is a perpetuating cycle.  Fall behind on your student loans and your credit score falls apart.  The lousy credit score makes refinancing your loans nearly impossible.  It also can hurt your chances at landing a better job.  Weak credit means higher interest rates on any other loan, and it makes finding a place to live harder.

With all the negative consequences, it would seem that people would do whatever it takes to avoid default, yet the numbers continue to grow.

An Easy Solution

Though private loans are a different story, nobody should ever fall into default on their federal loans.  The existence of income based repayment plans means that if you are unemployed, your monthly payments could be zero!  Under the pay as you earn repayment plan, borrowers are only expected to pay 10% of their discretionary income.  Even with these low payments, the loan will stay in good standing, and the borrower, while not making much of a dent in the principal balance, will inch closer to student loan forgiveness.

People who fall behind can also apply for forbearances and deferments to get back on track.  While this approach is not recommended because of the growing interest and the PAYE option, it still is a feasible way to keep your loans out of default.

With so many options to keep your head above water on your federal loans, how is it that the default numbers are so high?

The biggest problem is perhaps lack of knowledge.  Despite the many repayment plans offered by the federal government, many people seem unaware.  It is the reason the federal government will be partnering with the major tax companies to help educate people next year at tax time.

The other big issue is fear.  The first student bill that comes from the federal government is calculated based upon the standard 10 year repayment plan.  Because this repayment method results in high bills, borrowers may assume they can’t afford it and ignore the problem rather than addressing it.  The problem with this route is that things just continue to get worse.  Late fess get added.  Interest capitalizes.  Monthly payments go up.  It can make for a real mess.

Thus, even though it is easy to address federal student loans, people either don’t know about their options or they ignore their loans all together.

If you are struggling with federal student debt, start doing some research.  With little effort, you are likely to find a solution that fits your needs.  If you suspect someone else is struggling with their student loans, spread they word about income based repayment and the great programs that the government has available.  Doing so could make a huge difference for someone you care about.