By Gail MarksJarvis
Want to spot the “no exit” of painful debt?
It’s your student loans. If you borrow for college and find yourself unable to pay at some point, you won’t be able to escape the loans.
Unlike all other overwhelming debt problems, you are not allowed to take student loans into bankruptcy court and end up free of your responsibility.
On the other hand, you can get some relief on monthly payments for federal student loans if you pay on time.
Your payments can be reduced to a more manageable level if your income is too low to handle the full payment. And if you have no job, you can get permission from the government to skip your loan payments for a few months. But all that assumes you are on top of your loans and don’t decide to ignore what’s too upsetting to face head-on.
If you miss payments continually for nine months, and go into what’s called default, you will put yourself in a box that, in the long term, you will not escape.
Uncle Sam, who is your lender if you have federal student loans like Stafford or Perkins loans, has a good memory.
Your notices to pay your student loans might be stuffed into a drawer and you might be ignoring them, but Uncle Sam will come looking for the money.
Just ask seniors with outstanding student loans. Uncle Sam is taking money out of their Social Security checks to apply to their student loan debts. When you are younger, he can take money from your paychecks or take your income tax refunds.
So if you are in default, you can’t just ignore the payments and hope no one notices. If you get control now, you can polish over the past and eventually arrange payments you can handle.
And if you decided to ignore the loans because you couldn’t find a sympathetic ear when you called your loan servicer for help, don’t let that stop you.
This summer, new rules went into effect that help people who are considered in default on federal student loans. Those rules are likely to mean the person you call about your loans will be more accommodating than the person you called months ago.
Previously, the servicer who handled your loans might have insisted on a payment you couldn’t afford without considering your income or ability to pay.
Bill collectors representing the government’s student loan program might have demanded a huge payment all at once. Now, there’s a new formula that takes into account your income and family size, and presents payments that are supposed to be what the government calls affordable.
With more-affordable payments, a person in default goes through what’s called rehabilitation, said student loan consultant Heather Jarvis. “You still need to reach an agreement with your servicer” about the payments, but your income will be taken into account.
Keep in mind this only applies to federal student loans, not private loans you might have received from a bank or other lender.
To understand what you owe and get on track, contact the National Student Loan Data System. Then apply for what’s called loan rehabilitation, or the process of moving from default to regularly paying off loans with affordable payments.
For a sense of the impact of affordable payments, consider a student who took on $26,946 in recent student loans for four years in college. With a $25,000 annual salary now, the monthly payments are likely to start at $94 if the student’s income is considered.
The American Student Assistance loan estimator will allow you to consider your situation. As you use the estimator, look for payments covered by the government’s income-based repayment formula.
You can get your loans out of default if you make your payments on time each month for nine months.
Once you have done that, blemishes from your past will be lifted, although your credit score may still be scarred. But you will have more options in the future.
For example, if you want to go back to school, you will be able to get more federal loans. And if you make payments reliably for years, based on your income, some of what you owe may eventually be forgiven.
ABOUT THE WRITER
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.”