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What
might happen if you fall behind on your
student loan payments.
The Department of Education has powerful
tools to use against former students who
don't make their payments. Here's what
you can expect if you are in default.
Assessing Collection Fees
Defaulting on federal student loans can
cost you a bundle -- far in excess of
the amount you borrowed originally. Guarantee
agencies are allowed to charge collection
fees. Although the law often limits these
fees, they still can be quite high. In
addition, collection agencies charge the
Department of Education a commission of
about 28%. That commission is passed on
to you, meaning you have to pay the money
you owe on the loan, the collection fee
and the commission.
Grabbing Your Income Tax Refund
The IRS can intercept your income tax
refund until your defaulted student loans
are paid in full. It is one of the most
popular methods of collecting defaulted
student loans. Annually, the Department
of Education collects hundreds of millions
of dollars this way.
Each tax year, the agency holding your
loans must review your account to verify
that you haven't made payments on your
loans within the previous 90 days. Once
it verifies this information, the agency
notifies the IRS that your loans are in
default.
If you are entitled to a tax refund, the
agency will notify you that the IRS proposes
to keep all or some of it. To object,
you must present written evidence, within
65 days of the date on the notice, of
any of the following:
• You've repaid the loan.
• You are making payments under
a negotiated repayment agreement, or you've
been granted a cancellation, deferment
or forbearance.
• You have filed for bankruptcy
and your case is still open, or your loans
were discharged in bankruptcy.
• You are totally and permanently
disabled.
• It is not your loan.
• You dropped out, and the school
owes you a refund.
• You borrowed the money to attend
a trade school and either you were unable
to complete your education because the
school closed or you were falsely certified
by the school as eligible for the loan.
• The loan is not legally enforceable
for any other reason (for example, your
signature on the loan papers was forged).
Intercepting Your Paycheck
The Department of Education and guarantee
agencies are authorized to take ("garnish")
10% of the wages of a student loan debtor
who is in default. (The department is
attempting to increase this to 15%.) Unlike
virtually all other creditors, the holder
of your student loans does not have to
sue you first.
You can object to the garnishment if you've
returned to work within the past 12 months
after being fired or laid off. Call or
write to the agency. If you have been
continuously employed for the previous
12 months, you can raise one of the objections
permitted when the IRS seeks to intercept
your tax refund. (See above.)
You can also object to the garnishment
if it would leave you with a weekly take-home
pay of less than 30 times the federal
minimum wage or if garnishment would otherwise
result in an extreme financial hardship
for you.
The only other way to avoid wage garnishment
is to contact the holder of your loan
and negotiate a repayment schedule.
Taking Your Federal Benefits
Under the Debt Collection Improvements
Act, the government can take some federal
benefit payments (including Social Security
Retirement and Social Security Disability,
but not Supplemental Security Income)
to pay back certain federal debts, including
student loans.
The amount that can be taken is limited.
Only the first $9,000, or $750 per month,
can be seized. And the total amount taken
can never be more than 15% of your income.
If your Social Security benefits or other
qualifying federal benefits are $750 or
less, the government cannot take any of
your money.
Suing You
You can be sued forever on your defaulted
student loans. And the Department of Education
is suing former students more and more
frequently. Student loan collection lawsuits
filed by the department increased by 55%
between 1997 and 1998.
You aren't likely to be sued, however,
if the agency holding your loans determines
that:
• the cost would exceed any amount
it could get from you, or
• you have no assets that could
be taken to satisfy all or a substantial
portion of the debt.
What property the Department of Education
could take from you depends on where you
live. In most states, the department can
go after your bank and other deposit accounts,
and valuable personal property such as
cars and antiques. The department can
also file the judgment with the county
records office to create a property lien
-- a notice to the world that you owe
money. In some states, a judgment entered
against you automatically creates a lien
on any real estate you own in the county
where you lost the lawsuit. In other states,
the creditor must record the judgment
with the county. When you sell or refinance
your property, all liens must be removed,
usually by paying the lienholder, before
the deal can close.
Getting Help
If you need help with a defaulted student
loan, contact the Department of Education's
Ombudsman at 877-557-2575 or visit its
website at http://www.sfahelp.ed.gov.
The Ombudsman will only assist you if
you have first tried to work out the problem
on your own.
Student
Loan Repayment Options
The
variety of student loan repayment plans
available fit different needs and financial
situations.
When it comes time to repay your student
loans, you'll be relieved to know that
many lenders offer a variety of repayment
plans -- some of them quite flexible.
The plans available to you depend on the
types of loans you have.
If you have bank- or government-issued
federal student loans -- for example,
Stafford loans -- you can choose from
several repayment plans designed to make
your life less stressful. If you have
school-issued federal student loans --
such as Perkins loans -- ask your school
about its options for repayment. Private
loans, made without federal funds, come
with fewer repayment options. (These loans
are made primarily to graduate or professional
students, and have names such as MedCAP,
MBA-EXCEL, ENGAssist or LAWLOANS.)
You may want to pick just one method or,
if you have several loans, combine approaches
to create the best repayment strategy.
To investigate your options, call your
lender, loan holder or loan servicer.
But don't wait until you're seriously
behind in your payments -- if you're in
default on your loans, many of these options
won't be available to you.
If you're eligible for more than one repayment
plan, keep in mind that you aren't locked
into the method you choose. The holder
of your loan must let you change repayment
plans at least once per year.
Standard Repayment Plan
If you can afford the monthly payments,
you'll probably want to stick with the
original repayment plan offered by your
lender. A standard plan carries the highest
monthly payment but costs less in the
long haul because you pay less interest.
Your monthly payment amount and repayment
period will depend on your loan balance,
but as a general rule you can plan on
shelling out $125 per month for every
$10,000 you borrowed. You'll make payments
for a maximum of ten years.
Graduated Repayment Plan
Under a graduated plan, your payments
start out low and increase every two to
three years. This may be your best option
if you are just starting a career or business
and you expect your currently modest income
to increase steadily.
If you got a federal loan directly from
the government through the federal direct
loan program, your starting payments may
be half of what they would be under the
standard plan (there is no minimum amount,
but your payment can never be less than
the monthly interest due). Then they'll
increase every two years, for 10 to 30
years. Your monthly payments will never
rise to more than 150% of what the monthly
payments would be under the standard plan.
Other lenders may require that you pay
only the interest on your loans for a
few years. Then you'll switch to payments
of principal and interest until your loan
is paid off. Your repayment period will
always depend on the amount you owe; in
extreme cases, it may stretch to 30 years.
With any graduated repayment plan, you'll
pay more for your loan over time than
you would under a standard plan. This
happens for two reasons: First, because
interest charges are based on your unpaid
balance each month, if you keep a higher
balance in the early years of your loan,
you will pay more in interest. Second,
because you're likely to extend your repayment
period, you'll be paying interest longer.
Extended Repayment Plan
If you need long-term lower payments,
you might consider an extended plan. It
lets you stretch your repayment over a
period of 12 to 30 years, depending on
your loan amount. Your fixed monthly payment
is usually lower than it would be under
the standard plan, but you'll pay more
interest because the repayment period
is longer.
The federal government and many other
lenders allow you to combine an extended
plan with graduated payments, which will
lower your payments even further -- and
increase your overall costs even more.
Postponing Repayment
If your loan payments are enormous or
you've fallen on hard times, even the
most flexible payment plan might not make
ends meet. In many circumstances, it's
possible to temporarily postpone paying
your loans or reduce the amount of your
payments. These periods of relief are
known as deferments (during which the
government pays your interest) and forbearances
(during which the amount you owe keeps
going up because interest isn't being
paid).
Don't wait until you're already in default
because of missed payments -- if you do,
your options will be greatly reduced.
At the first sign of trouble, call your
loan holder and explain that it's impossible
for you to make your monthly payments;
you can explore your options for deferment
or forbearance with the loan holder's
representative.
For more on postponing payments, see When
You Can't Pay Your Student Loan: Cancellation,
Deferment and Forebearance. Income-Based
Repayment Plan
If your income is low or unstable, an
"income-contingent" or "income-sensitive
repayment" plan may be right for
you. As your income rises or falls, so
do your monthly payments.
The amount of your payment is refigured
every year, based on your annual income,
household size and loan amount. If you
are married and file a joint federal tax
return, under current rules your joint
income is used to calculate the required
monthly payment.
Federal Direct Student Loans. If you have
a federal direct Stafford or consolidation
loan, you can choose an income-contingent
repayment plan. PLUS loans are not eligible.
The amount you pay annually will vary,
but it will never exceed 20% of your discretionary
income -- that is, your annual gross income
less an amount based on the poverty level
for your household size.
(To learn what your maximum payment will
be, call the direct loan servicing center
at 800-848-0979 or use the online calculator
at http://www.ed.gov/DirectLoan/calc.html.)
If your income is very low, you may not
be required to pay anything under an income-contingent
plan -- or the amount you pay each month
may be less than the amount of interest
that is accumulating. This may feel like
a relief, but as time goes on, your loan
balance will continue to grow.
The only relief comes after 25 years --
if you haven't paid off the loan by then
(not including periods of deferment or
forbearance), the government will forgive
the rest of what you owe. Even then there's
a bit of a catch: The IRS will require
you to report the amount forgiven and
pay taxes on it unless you can prove that
you are insolvent.
Federal Loans From Financial Institutions.
If you obtained a federal Stafford, SLS,
PLUS, HEAL or consolidation loan from
a financial institution, your lender or
other loan holder probably offers an income-sensitive
plan. Such plans are similar to the government's
income-contingent plan, with a few important
differences: There is no provision for
loan forgiveness as there is under the
government's plan, and because monthly
payments must cover at least the accruing
interest, the payments will never be as
low as those under an income-contingent
plan. Also, your monthly payments may
be slightly higher, because you must pay
your loans in full.
Loan Consolidation or Refinancing
With loan consolidation, you can lower
your monthly payments by combining several
loans into one packaged loan and extending
your repayment period. As with the other
low-payment options described above, consolidating
your loans may greatly increase the amount
of interest you pay over the life of your
loan. Occasionally, however, it may be
possible to refinance several loans, or
just one loan, to secure a lower interest
rate.
You may want to consider consolidating
your loans if:
• You can't afford the monthly payments
on your federal student loans, don't qualify
for a postponement and aren't eligible
for any of the low-payment plans described
above. This may be true, for example,
if you have older federal loans.
• You qualify for some of the low-payment
plans described above, but you are so
deep in debt that you still can't afford
your monthly payments. This may be true
if you have many federal loans, or if
you have private loans -- which typically
aren't eligible for flexible payment plans
or consolidation -- in addition to your
federal loans.
• You can afford substantial monthly
payments and intend to pay off your loans
under a standard ten-year plan, but you
want to refinance at a lower interest
rate.
• You want to get out of default
fast so that you can qualify for new loans
and grants to attend school.
Many different lenders, including the
federal government, offer consolidation
loans. Your repayment options will vary
slightly depending on the consolidation
lender you choose. Ask potential lenders
to help you calculate your payment amounts
and overall costs before you make a decision.
More
Information About Loan Consolidation
Because of the complexity of servicing
federal student loans, only a few lenders
offer consolidation programs. Here's how
to contact the largest of them.
Sallie Mae
http://www.salliemae.com
800-524-9100
Citibank
http://www.studentloan.com/
800-967-2400
Federal Direct Consolidation Loan
Information Center
http://www.ed.gov/offices/OSFAP/DirectLoan/index.html
800-557-7392
Department of Health and Human
Services
(HEAL loans only)
301-443-1540 Copyright
© 2003 Nolo
What
to do if a bill collector crosses the line..
Here's
what to do if a bill collector uses abusive tactics.
It's stressful to be unable to pay your bills
on time. It's even more stressful to hear from
a bill collector about those overdue debts. Although
bill collectors can be persistent (that's their
job), many are careful to follow the law when
contacting you. Unfortunately, some are not. If
a bill collector oversteps the bounds of the law,
you can take action.
The Fair Debt Collection Practices Act
The federal Fair Debt Collection Practices Act,
or FDCPA, prohibits certain debt collectors from
engaging in abusive behavior. It covers debt collectors
that work for collection agencies. It does not
cover debt collectors that are employed by the
original creditor (the business or person who
first extended you credit or loaned you money).
If a debt collector that works for a collection
agency breaks the law, you can take steps to make
sure it doesn't happen again.
It's illegal for bill collectors to:
• contact third parties, other than your
attorney, a credit reporting bureau or the original
creditor, except for the limited purpose of finding
information about your whereabouts (collectors
can also contact your spouse, your parents if
you are a minor and your co-debtors unless you
have asked them in writing to stop contacting
you)
• call you repeatedly or contact you at
an unreasonable time (the law presumes that before
8 a.m. or after 9 p.m. is unreasonable)
• contact you at work if your employer prohibits
it
• use or threaten to use violence
• use obscene or profane language
• place telephone calls to you without identifying
themselves as bill collectors
• claim you owe more than you do
• claim to be attorneys if they're not
• claim that you'll be imprisoned or your
property will be seized
• send you a paper that resembles a legal
document, or
• add unauthorized interest, fees or charges.
Here's what you can do if a debt collector
engages in illegal activity:
1. Tell Them to Stop
Under the FDCPA, you have the right to tell a
collection agency employee to stop contacting
you. Simply send a letter stating that you want
the collection agency to cease all communications
with you. All agency employees are then prohibited
from contacting you, except to tell you that collection
efforts have ended or that the collection agency
or original creditor may sue you. You can do this
even if the collector is not breaking the law.
2. Document Illegal Behavior
If a debt collector breaks the law, document the
violation as soon as it happens. Start a log --
and write down what happened, when it happened
and who witnessed it. Then, try to have another
person present (or on the phone) during all future
communications with the collector. In some states,
you can record phone conversations without the
debt collector's knowledge. In others, this tactic
is illegal. Check with your state consumer protection
agency to find out what is permitted where you
live.
3. File a Complaint
File an official complaint with the Federal Trade
Commission (FTC), the federal agency that oversees
collection agencies. Ask the FTC to send you a
complaint form, or just write a letter. Contact
the Federal Trade Commission at 6th and Pennsylvania
Ave. NW, Washington, DC 20580, http://www.ftc.gov/ftc/complaint.htm.
Include the collection agency's name and address,
the name of the collector, the dates and times
of the conversations, and the names of any witnesses.
Attach copies of all offending materials you received
and a copy of any tape you made.
Also, send a copy of your complaint to the state
agency that regulates collection agencies for
the state where the agency is located. To find
the agency, call information in that state's capital
city.
Finally, send a copy to the original creditor
and the collection agency. The original creditor
may be concerned about its own liability and offer
to cancel the debt.
Once your complaint is filed, don't expect immediate
results. The FTC may take steps to sanction the
agency if it has other complaints on record. The
state agency may move more quickly to sue the
collection agency or shut it down for egregious
violations. Your best hope is that the creditor
will offer to cancel the debt.
4. Sue the Debt Collector
If you've been subject to repeated abusive behavior,
consider suing the collection agency. But don't
bother if the illegal behavior was annoying but
nothing more. For example, if the collector called
three times in one day but never again, you probably
don't have a case.
You can represent yourself in small claims court,
or hire a lawyer and go to regular court. (The
other side may have to pay your attorneys' fees
and court costs if you win.) You're entitled to
any actual losses -- for example, your pain and
suffering, or the amount you paid to switch to
an unlisted number to avoid harassment -- and
an additional amount (unrelated to actual losses)
up to $1,000 for any violation of the FDCPA.
Copyright © 2003 Nolo
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