Defer or Default?
February 4, 2011 2:19 PM   Subscribe

I have $33,000 in subsidized federal student loan debt. This past year my loans have been in deferment, which means that accumulating interest has been capitalized. I earned approximately $6000 last year. My annual income has never been above $18k. Between the job market and child care for my kids, the future doesn't look much better. What happens if I default on my loans? Is there a better option for me than deferment?
posted by anonymous to Work & Money (12 answers total) 10 users marked this as a favorite
With federal loans, you may be able to consolidate in the William D. Ford program through the Department of Education, and then go on an income-contingent or income-based repayment plan. Payments should be fairly manageable.
posted by dilettante at 2:30 PM on February 4, 2011 [5 favorites]

I'm in default on several of my student loans right now, so here's first-hand experience:

Student loans don't ever go away: not bankruptcy, they don't get written off for nonpayment, they never fall off your credit report after so long. You will always be pursued to pay them off.

Most likely, your loans will be sent off to a collections agency, who will go to great lengths to get you to start making payments. The good news is, 9 months of a good payment history usually wipes the bad history from the record. This is only of use for your credit score and for going back to school (you can't get new loans if you're in default). The monthly payments the collection place were asking was 1% of the loan. Once a collection agency gets involved, don't expect your lender to respond to you: they will direct you to the collection agency at all costs.

If you can't keep up good payments, they garnish your paycheck. Student loan garnishment doesn't require a judge's order like your credit cards do. The student loan servicer just sends a letter to your employer, and something like 15% to 25% of your paycheck gets taken. You can dispute the amount of the garnishment on basis of hardship, but it's unlikely to get your removed from garnishment. Expect at least 10% even if you go that route.

If you have more than one loan from multiple lenders, each is treated seperately; there's a federal max of 25% of your paycheck, so if you got three lenders and each is asking 15%, the first gets 15%, the second gets 10%, the last just waits until either of the first two gets paid off and then they start getting paid.

AFAIK, the only way to get out of garnishment is to get your 9 months of good payments...on TOP of the garnishment. That, or pay off the loan. So, 15% of my paycheck, plus 1% of the balance on the loan, means I guess I've got another four or five years of garnishment unless I get a big raise or inheritance or something. It's not the way to go if you can avoid it at all.

Several of my loans was too far into the process to get refinanced, but the rest got lumped together into a Direct Loan from the Dept of Education -- with income-based payments. You can consolidate even if you're in default, but not if the garnishment process has started. I recommend you apply for consolidation now. My payment on the $15,000 that got consolidated is $42 per month. The garnisment on the remaining $15,000 is $280 per month.
posted by AzraelBrown at 2:40 PM on February 4, 2011 [1 favorite]

Seconding doing what you can to move to income-based repayment.

"What federal student loans are eligible to be repaid under an IBR plan?

Any Stafford, Grad PLUS or Consolidation loan made under either the Direct Loan or FFEL program is eligible for repayment under IBR, EXCEPT loans that are currently in default, parent PLUS Loans, or consolidation loans that repaid a parent PLUS Loan. The loans can be new or old, and for any type of education (undergraduate, graduate, professional, job training)."

If that applies to you, definitely move to IBR. With your limited income, it's likely your payments will actually be zero (scroll down on the page I linked to see a chart of maximum monthly payments under IBR). Note that interest will still accumulate, but after 25 years of IBR any remaining balance is canceled.
posted by jedicus at 2:43 PM on February 4, 2011 [1 favorite]

Have you called your loan servicer (my understanding is that all federal loans are serviced by the government and not the original lenders anymore, but I could be wrong) and talked to them about what your options are? Usually they'll ask you a bunch of questions and then tell you what assistance you qualify for. I was on an income-based program, and they adjusted it when my income changed.
posted by elpea at 2:44 PM on February 4, 2011 [1 favorite]

Can you pay just the interest while they are in deferment, to keep it from being capitalized? At least then, they won't grow.

Of course, I don't know if continued deferment is an option for you or if the interest alone is significantly less than the normal monthly payment such that you might be able to swing it.
posted by eviltwin at 2:45 PM on February 4, 2011

Here's another source of information about income-based repayment. Given your income and family size it would likely be to your advantage.
posted by statsgirl at 3:03 PM on February 4, 2011 [1 favorite]

If you're on a deferment, your subsidized loans would NOT capitalize any interest for the period of the deferment. Are you sure it isn't a forbearance?

If you don't expect your income to change in the future, IBR would probably be a good option for you.

Also, student loans CAN be discharged in bankruptcy (chapter 13 bankruptcy). It's just that it's very tough to do this so you should never count on it being an option.
posted by Lobster Garden at 3:10 PM on February 4, 2011

IAASLC (Student Loan Counselor).
posted by Lobster Garden at 3:11 PM on February 4, 2011

You should check on income based repayment. I have $100,000 in student debt, make mid 5 figures and pay $220 a month on my loans.
posted by Happydaz at 6:01 PM on February 4, 2011

Just so you know, if you consolidate your student loans, you are no longer eligible for deferment or forebearance, as far as I know.
posted by two lights above the sea at 7:24 PM on February 4, 2011

Just so you know, if you consolidate your student loans, you are no longer eligible for deferment or forebearance, as far as I know.

This is incorrect. See here for more details (that's the website for the federal loan consolidation program, which is basically the only one going these days). I don't even think it's true for Sallie Mae-consolidated federal (not private!) loans, as I have one of those and believe I can still defer or ask for forebearance as before.

In fact, consolidation may offer more deferment options ("Borrowers with consolidation loans may qualify for renewed deferment benefits. If borrowers have exhausted the deferment options on their current Federal education loans, a consolidation loan may renew those deferment options."). What consolidation does do is take away your grace period (the six months after you stop school where you are not asked to pay your loans) but this is likely irrelevant to the OP, who is well into repayment.

Note that I do not recommend, as a person who did it, a consolidation loan unless you can't get IBR for some reason. It's no longer the savings that it was in the 90s and early 2000s. I definitely recommend asking about IBR and making that work as well as possible for you.
posted by librarylis at 9:20 AM on February 5, 2011 [1 favorite]

My loans are through Sallie Mae, and I have called the regular old customer service number on two separate occasions and just told them, "hi, my monthly payments are not affordable for me right now, what do I need to do to have them lowered so that I can keep up with payments?" and they just lowered them immediately on the spot (the last time I did it, they lowered it almost to 50% of what it was about to increase to). Obviously, I'm going to incur more interest on those loans that are being paid off more slowly.

My understanding is that if I couldn't afford the payment they offered as the lowest possible monthly rate they could offer over the phone like that, I could file paperwork for income-based repayment.
posted by so_gracefully at 6:11 PM on February 5, 2011

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