Don't let your student loans go into default
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Student loans are a fact of life for 40 million American consumers. In North Carolina, 61% of graduates leave college with student loan debt and average more than $24,000 in student loans. But for many, the debt is much higher. In particular, for those who attended private schools or not-for-profit schools, college debt may be much higher. And if you can't afford your federal student loans, you face what can be a life-long battle to deal with the debt – particularly if you go into default. Here are five things you must know about student loan default.
#1 Default is 100% avoidable
First, being late on your loans doesn't mean you're automatically in default. Default is a very specific term that means you haven't made a payment on your student loans in nine months or longer. But there are a number of affordable repayment programs – like Income-Based Repayment (IBR) and Pay as You Earn (PAYE) - that can drop your payments to just 10-15% of your disposable income (adjusted gross income minus 150% of federal poverty line for your family size). You can rehabilitate your loans even if you are delinquent (the student loan term for 60-269 days past due) or already in default.
#2 Default can wreck your finances
Student loan servicers have more power than almost any other creditor (save the IRS). In North Carolina, federal student loan debt collectors are one of the few creditors allowed to garnish your wages. You can see up to 25% of your after-tax wages garnished. If you are approved for a hardship defense, the limit can be dropped to 15%. Either way, this can make your life very hard. The calculation is that the max garnishment is the lesser of:
- Your weekly wage minus 30 times the hourly minimum wage; or
- 15% of your disposable pay (gross wages minus required deductions)
#3 Default can cost you your home
There is no statute of limitations on federal student loans so that means the debt collectors can wait until your income improves, or you buy a home. They can then sue for a judgment and attach it to your bank account, car or home. If you have no assets, Department of Education debt collection agencies likely will not sue, but will wait until it's advantageous since they have plenty of time. Garnishment is much more likely to result than a lawsuit seeking a judgment, but the threat is always there lurking, waiting for your circumstances to improve so they can strike.
#4 Default can result in tax refund and Social Security seizure
The government's debt collectors can take your tax refunds or government benefits including Social Security. And the government won't stop with one tax refund, they will seize it year after year to apply to your student loan debt. This can cause huge financial problems for those that rely on their income tax refund to pay down debt or make major home or auto repairs. Social Security benefits and some Railroad Retirement benefits can be taken by federal student loan debt collectors. Any Social Security in excess of $750 per month are eligible for seizure.
#5 Default can cost you a job or your professional license
North Carolina does not have legislation in place that allows suspension of your professional or drivers license because of student loan default. However, if you move to any of the other 30 states that day, you could be in deep trouble if you're behind on your loans. Nurses, attorneys, contractor and even school teachers can lose their license to practice (and ability to earn a living) if they fall far behind on their college debt. But even in states that haven't adopted this practice, many employers run credit checks and a default looks bad and can make your FICO score take a nosedive that can cost you a job.
It's a myth that student loans cannot be wiped out in bankruptcy. They can if you have a proven inability to pay due to ongoing serious illness, permanent disability, extreme low income that's not likely to improve or issues with the school itself. Even if you can't get your student loans reduced or discharged in bankruptcy, you may be able to use bankruptcy stop a garnishment long enough to rehabilitate your loans. And shedding other debts can help you free up cash to deal with your student loans.
Contact the Law Offices of John T. Orcutt to find out more about the financial peace of mind bankruptcy offers. Call +1-919-646-2654 for a free bankruptcy consultation in Greensboro, Raleigh, Fayetteville, Durham, Wilson or Garner.