Student Loans

What Happens if you Default on a Student Loan

November 23, 2018 By Thomas Bawdy Leave a Comment

This post in collaboration with Paul Brian.

Believe it or not, student loans are one of the most secured loans a lender can issue. In the vast majority of cases, student loans cannot be discharged under bankruptcy protection, nor can they be negotiated away under a debt settlement program. If you have one, you will satisfy the terms, there’s simply no escaping it.

Here’s what happens if you default on a student loan.

First, What Constitutes Default?

The exact conditions of a default vary a bit from lender to lender, but in the case of Federally backed student loans, nine months of missed payments will get your student loan classified as being in default. It could also be found to be in default if you violate some other aspect of the loan agreement, or got the loan under fraudulent circumstances.

If any of the above happens, you’ll experience the following.

1. Forfeiture of All Loan Benefits

The loan will become due and payable immediately—including interest payments and late fees (if any). You will not qualify for loan forgiveness, deferment or forbearance. If you decide to go back to school and have a loan in default, you can forget about all forms of financial aid.

2. Assignment to a Collection Agency

Get ready for incessant phone calls, text messages and emails. These people have an uncanny knack for knowing the most inopportune moment to contact you and hound you mercilessly (while staying well within legal bounds) until you agree to a plan to repay the loan and stick to it. You can also be taken to court in extreme situations.

3. A Negative Entry on Your Credit Report

The default will be reported to the credit agencies, which will pull down your credit score significantly. A huge part of your credit score (35 percent) is loan payment history. A default on your record will pretty much wipe that category out. This will make it difficult for you to get a mortgage, rent an apartment, buy a car, get insurance and in some cases, even get a job.

4. Wage Garnishment

If your lender takes you to court and gets a judgment against you, the court will order your wages garnished until the amount of the loan (as well as fees and interest) is paid. This will mean an embarrassing situation at work and a large portion of your income will go straight to paying off the loan—before you ever see it.

Avoiding Default

If you’re concerned you might be about miss payments, contact your lender at once and try to work out some sort of an arrangement to help you stay on track. If you have a Federal loan, you might qualify for forbearance or a deferment of up to six months to help you get your finances back in order. If you’re still in good standing, you might be able to renegotiate the loan to lower your payments. The key is catching things as early as possible so you have the best options.

Getting Out of Default

The good news is default status isn’t the end of the world. All they really want is the money. Find a way to repay them in full and the default will be dismissed. Yes, it will take a while for your credit score to recover, but getting it marked “paid in full” will help.

Of course, if your student loan is in trouble, odds are many of your other debts are too. This is when you might consider hiring a debt relief firm.While these companies don’t deal with federal student loans, they could help settle your credit card, personal loan, and medical debt, which could make it easier to repay the student loan. As you explore this option, take some time to research information such as these Freedom Debt Relief reviews to make sure you choose a good company.

In conclusion, student loans might be some of the biggest loans you take on in your life. But unlike other loans, once they are taken out, payment is inescapable. Do everything you can to avoid defaulting on your student loans.

What Effect Does Student Debt Have on Home Ownership?

November 14, 2015 By Satinder Haer Leave a Comment

Millennials are doing things differently than previous generations, especially when it comes to homeownership. Compared to just a couple decades ago, first-time home buyers today are delaying home purchases and renting for longer – and most are millennials. The low rates of homeownership in this demographic have been primarily blamed on overwhelming debt from student loans. After all, Americans owe a combined $1.2 trillion in student debt. While student loan debt can impact an individual’s ability to save for a down payment or qualify for a mortgage, new data suggests it is a myth that student debt is the reason homeownership rates are low among recent graduates.

As long as you get a four-year degree or higher, the effect of student debt is actually negligible on your probability of becoming a homeowner. If you obtain a bachelor’s degree with no student debt, you have a 70 percent probability of owning your home. Someone who graduates with the same degree and $50,000 of student loans has a 66 percent probability. The likelihood of homeownership only drops a measly 4 percent even with $50,000 of undergraduate debt.

For married couples, the key is getting at least one degree between the pair. If at least one spouse has a bachelor’s degree and no student debt, the couple’s probability of homeownership is 69.8 percent. Add in $30,000 of student debt for that degree and the probability drops a mere 2.1 percentage points. Getting approved for a loan or saving for a down payment might take time but the research shows student debt isn’t a major hurdle in homeownership, whether you’re married or single.

Graduate school loans have an equally minor effect on homeownership. Obtaining a masters, medical, law or doctorate degree actually insulates you from the adverse effect of student debt when you buy. The probability of homeownership is highest for individuals with a doctorate and no student debt; they have an 87 percent chance of owning homes. That likelihood only drops to 84 percent if the individual incurred $50,000 of student loans obtaining the doctorate. At the master’s degree level the probability falls from 80 percent if you have no debt, versus 75 percent with $50,000 in student loan debt. Getting an advanced degree increases your overall likelihood of owning a home, despite the small negative impact student loans have on your probability of homeownership.

Individuals with an associate’s degree or no degree are impacted the most by student debt. The probability of homeownership drops from 73 to 57 percent if you obtain an associate’s degree with no student loans versus carrying $50,000 of debt. And for those with no degree, homeownership probability is even lower. The probability of homeownership is 48 percent for an individual with no degree and no student debt and declines steadily with the debt amount. Getting at least a four-year degree significantly increases your odds of owning a home.

The outlook is positive for millennials who want to become homeowners. Not only should student loans have a minor effect on ownership, the research reveals millennials who put down 5 percent and spend 30 percent of their income on a mortgage can afford 70 percent of for-sale homes on the market. While this inventory isn’t spread evenly across the country, buyers who focus on properties in the Midwest and South can afford as much as 86 percent of the for-sale homes. In major metro areas, the pickings are much slimmer; millennials can only afford 25 percent of the inventory in Los Angeles and 27 percent in San Diego. Location is key to affordability, especially for individuals also balancing student loan debt.

Recent graduates should not shy away from exploring their options. It’s surprising how many homes millennials can actually afford, despite their student loan debt.

Pay Off Your Debt for Good

August 18, 2015 By Nic @ Young and Wealthy Leave a Comment

“There are two ways to enslave a nation. One is by the sword. The other is by debt.” There is an ongoing debate on the internet about whether or not that quote was first said by John Adams. Regardless, the quote is very powerful with its meaning. Debt is slavery. With debt you are controlled by the person in which you owe. If you don’t believe me, stop paying your monthly payments on your house, car, or other loans. The bank or other creditor will come along and seize that asset from you or other assets that have been used as collateral. Debt is very powerful and can take a massive financial and psychological toll on us. Paying off our debt can lead to previously unfathomed levels of financial freedom and happiness. I’ve started Young and Wealthy Living to help others realize this dream.

Today, we will observe multiple methods that can be used to pay off different types of debt faster by taking various steps.

The Debt Portfolio

If you’re like most people, you have many different forms of debt. These could be a credit card balance, mortgage, student loans, car payments, or personal loans. If you are looking to make more than just your monthly payments on these loans, I commend you, this is the first step to finally becoming debt free. But you may be wondering, which loans should I put the extra payments toward? To answer this we will use the debt stacking method, as I strongly believe that this is the best way to attack debt. It’s very simple and straightforward. Put extra payments to the debt with the highest interest rate and pay the minimum payments on the rest of the debts. The reason this method works is that over time you will be able to accelerate how quickly all of your debt will be paid off since more and more of your payments will be going towards the principle instead of the interest. Using the debt stacking method you will pay less in total interest and you will have all of your debts paid off faster than if you just used the shotgun approach on your debt.

If you’re like me, you graduated with student loans consisting of private and federal loans. My student loans ranged from 3% interest to 6.8% interest. If you plan on taking the full ten years to pay off your student loans, you could be paying thousands of dollars in interest alone over this time period. If I had only been making the minimum payments on my loans I would have paid over $10,000 in interest alone. To help lower your monthly payments and literally save yourself potentially thousands of dollars in interest, you can consolidate all of your loans into one loan. Yes, you read that correctly. Not only does this give you only one loan to have to keep track of and remember to pay, but it would most likely lower your interest rate and save you money. A couple of good resources for this are Sofi and Earnest. You can also check with local credit unions as many of them offer this service as well. There are a couple things to note, however. First, many services will require that you be employed or have an offer of employment and some might require that you have an emergency fund setup. Continue to make the larger payments you had before consolidating and you will have your student loans paid off ahead of time!

Credit Cards

The average credit card debt for American adults with a credit card is $5,047 according to creditcards.com. Unfortunately, credit card debt is usually the most painful because it typically carries the highest interest rate of debts people are likely to have. It is not unlikely to see credit cards with an APR of 15% to 24%. If you are carrying a large balance on your credit card you can expect to pay thousands of dollars in interest before your card is paid off and have it take years to do. The key to lowering your payments on the credit card debt is to lower your interest rate. This will allow you to pay off that debt faster and potentially saving you thousands in interest payments.

The first method here if you have a high credit card balance and are struggling to make your payments is to transfer your balance to a new card that offers an introductory offer of 0% interest on balance transfers. A couple of great cards for this are the Chase Slate and Discover It cards. This introductory rate is only good for a period of time however, typically 12 to 21 months, before it increases to the typical 15% – 24%, so you should be paying as much as possible during this time as 100% of your payments would be going towards the principle. Again, there are a couple things to note here. Sometimes there is a fee to transfer a balance, oftentimes of 3% – 5% and you will need good to excellent credit to qualify for the best offers.

Another method you should try if you have not already: simply ask. Just call up the credit card company, be very polite, and explain to them that you would love to pay off your credit card debt but the current interest rate makes it very difficult for you to make extra payments. Then ask them if they could lower your interest rate for you. You may initially get a ‘no’ but it is very likely that you will need to go through several people in the company before you reach someone that has the authority to negotiate this. Just remember to be polite to the person on the other end of the phone and they will be willing to pass you along to someone who can help.

You may think the credit card company doesn’t care about you and if you can make your payments or not. But the truth is they absolutely want you to make your payments and have a payment plan you can afford. They would much rather work with you and have you pay off your debt than to sell your debt to a collections company for pennies on the dollar.

Of course, these are not the only methods you can use to decrease payments and pay debt off faster but we all have our favorites and those we believe to be the most effective. Recognize how debt has the ability to control you and make a plan to attack it and you will be well on your way to wiping out your debt and becoming debt free! Feel free to share your debt elimination plans and stories with me by emailing me at nic@youngandwealthyliving.com. Together we can conquer our debt and be on the path to financial freedom!