How Do Student Loans Work For Grad School? | Student Loan Planner

What happens when you've defaulted on your student loans and you just don't know what to do? That happens to a lot of borrowers all across America. And the first thing I want you to know is if that has happened to you, don't stress. This is not a life-altering, destroying kind of thing that can happen to somebody because it is something that can be recovered from. It's a fairly straightforward process, too, to not have this destroy your financial future. But here's what to expect when you have defaulted on your student loans. First off, the way a loan gets into default is it goes first into delinquency. What that means is after 90 days of a late payment, a servicer is going to report to a credit agency that you have made a late payment on your student loans. That's a delinquent student loan status. They'll certainly reach out to you to try to get that corrected, to try to get you to make that payment on that loan. But that is the first step on the road to default. That's about three months. Now, if you look at the period of default, that's about 270 days. So if you're looking at that amount of time, it's roughly nine months, right? And after 270 days of non-payment, your loan is declared in default, and it basically gets turned over to groups that try to remedy this. And these groups are not that effective, not that helpful, even compared to loan servicers in a lot of cases. They're not particularly good, in my experience. And these are the options for federal loans that you're going to be looking at. For federal loans, you definitely don't want to default, because they can garnish your wages, they can garnish your tax refunds, they can even garnish your Social Security. So you're not going to get out of it by defaulting on your federal student loans. Furthermore, the garnishment is usually at about 15% of your income, and pay-as-you-earn and revised pay-as-you-earn are two options that are available to most borrowers. Those payment plans allow you to pay 10% of your income. So if you're truly broke and you're in default, then one of the worst things you can do is actually default, because the IRS can just take the money. Not the IRS, rather, the Department of Education. But that's what people think of, right? So, anywho, what happens is, that's what happens when you go into wage garnishment. They take any refund that you're expecting on your taxes that you're getting, they're going to seize that. It's just really an unpleasant process. Now, the way out of that is through rehabilitation or consolidation. So rehabilitation is a nine-month process of you making agreed-upon monthly payments on your loans. Often they'll be kind of driven by your income, or there'll be some sort of set amount, and you'll pay that for nine months. And the benefit of a rehabilitation is the loans can kind of go back to the way they were, in the sense that that credit report kind of gets expunged of that negative event that happened. So in other words, all that negative stuff that happened on your loans comes off your credit report, and you're free from that impacting you financially. Now, that is a very difficult process. Usually when people are in default, there's different reasons. Some people are truly struggling. Other people are just blown away from the complexity of our student loan system, and they're so stressed out, and they just don't want to think about it no matter what. They just try to not have it enter their mind, because it just gives them extreme anxiety every time they think about their loans. And if that's you, then rehabilitation might not be something that you're going to be able to do. What you might have to do instead is something called consolidation. So you might have to consolidate that loan from a defaulted status to a new consolidation loan. The benefit of that is it's going to give you an additional three years worth of forbearance, which does not count towards default. And that also is going to allow you to sign up for income-driven repayment programs, and it will not take that default off of your record, but it will make it a lot easier to make payments, because you'll have one big loan at one place instead of a whole bunch of loans a lot of different places. And it's going to make the process of signing up for income-driven repayment a lot easier as well, year to year. So if you're in default, get help. Here's also a free phone number to call at the Department of Education. That number to call is 800-621-3115. That number, if you call it, is a group of people at the Department of Education that are dedicated to helping defaulted student loan borrowers. I would definitely give them a call and ask for an explanation of rehabilitating your loans if you can, or if you cannot do that, if that's just too stressful for you, just ask them for help consolidating your loans and getting them out of default. Do not default in your student loans, or at least do not keep them in default long-term. The government's eventually going to get their money. And for private student loans, that is a little bit more complicated. That is something that usually a court is going to sue you and get basically a judgment or a decision against you for having to pay back some of that money. You really cannot get out of private student loans that easily. There are, however, some attorneys out there that do exist that are able to help people get negotiated deals with these private loan companies. But know that usually those settlements are 90 cents on the dollar. It's pretty uncommon to have your defaulted private student loan completely wiped away unless you're in extreme financial circumstances. So federal loans are the worst to default on. Private loans are still bad to default on, but if you do, you probably have a little bit more recourse and you would need to consult with an attorney. So thanks so much for watching. I'm Travis with Student Loan Planner.