I’ve heard from many people that are hurting right now because of the COVID-19 outbreak. Some have an emergency fund in place or can pause mortgage payments, while others were in dire straights before and might be in worse shape now.
Many are struggling with student loan payments. You might not know what to do if you’re facing default or having trouble paying your student loans. Or maybe you’re curious about what happens to your student loans if you stop paying.
Minsky is an attorney focused entirely on helping student loan borrowers and their families. He’s based in Boston but is licensed to practice in Massachusetts and New York. Minsky is also a senior contributor at Forbes.
Fleischman has been a consumer protection attorney for 20 years and has offices in New York and Los Angeles. He also is the host of Student Loan Show, a podcast dedicated to helping borrowers with their student loan debt.
NOTE: A quick reminder that this is for educational purposes only and is not legal advice. If you want legal advice, reach out to an attorney for help with your specific situation.
Dealing with student loan default
Two programs exist that allow you to get your defaulted student loans back into good standing:
- Rehabilitation: A temporary monthly payment program lasting a minimum of nine months.
- Consolidation: You take out a new loan through the Department of Education to pay off the defaulted loans.
These programs only apply to federal student loans and won’t work for private loans.
“Which one is best for a borrower really depends on their circumstances as well as their priorities,” said Minsky.
The rehabilitation program takes longer to complete. It can give you a better outcome on your credit report because any reference to the loan being in default is removed from your credit history.
Consolidating can be done in 30 to 60 days, so it’s much faster. The downside is the history of missed payments can stay on your credit record for up to seven years.
If your goal is to get the default taken care of as quickly as possible, consolidation is the better choice. Taking the longer route of rehabilitation makes more sense if you’re trying to improve your credit score.
“Just right there, we have two competing priorities or considerations,” said Minsky. “It also depends on exactly what’s going on with their loans.”
For instance, consolidation won’t be an option if your wages are subject to a garnishment order. Rehabilitation might be an option, but paying the garnishment on top of the rehabilitation plan can be more expensive.
How many loans you have and who your servicer is also plays a role.
So “even if the credit report is the most important consideration, it doesn’t necessarily mean that rehabilitation is the way to go,” said Minsky.
There is no one size fits all, which is why consulting with a lawyer is often the best course of action when you’re facing student loan default.
Settling student loan debt for less than you owe
When dealing with debt that you can’t pay, some lenders will let you settle for paying less than you owe. That’s true for credit card debt, tax debt, and student loan debt. Private lenders are more likely to settle your student debt than if you borrowed federal funds.
Private student loans are governed by a statute of limitations, which shortens the time a lender can collect what you owe them. It’s generally six years, though it varies by state.
Federal student loans have no statute of limitations. They remain outstanding until you pay them off in full, or the loans are discharged or forgiven.
“A statute of limitations limits the amount of time that a creditor of any sort can bring legal action to force the borrower, or debtor as the term may be used, to repay that debt,” said Fleischman.
Private student loan lenders are very aware of the “ticking clock, and they’re far more likely to be in a position to come to the table and negotiate a resolution of that debt,” said Fleischman.
Settling federal student loan debt isn’t as common, but it is possible. A settlement of federal student loans uses a compromise, just as an offer in compromise is used to settle federal income tax debts.
How student loan default impacts forgiveness
As you’re deciding which path to take to get your student loans out of default, student loan forgiveness is another consideration. Your choice could eliminate any progress you’ve made toward having your loans forgiven.
Consolidating your loans is the quickest solution to get out of default, but it also resets the clock on student loan forgiveness.
“For instance, if you have direct loans and made five years of progress towards Public Service Loan Forgiveness and then you defaulted on those loans, you probably don’t want to consolidate because you’ll be erasing those five years,” said Minsky.
If you’re in this situation, rehabilitation might make more sense. The process takes longer, but you’ll be able to preserve the progress you made toward forgiveness.
Bankruptcy and student loan debt
If you think filing bankruptcy will get you out of your student loan debt, it isn’t as easy as you might think.
Student loan debt isn’t automatically discharged in bankruptcy. To discharge your student loans, you must file an additional legal action against the student loan lenders and student loan holders in bankruptcy court.
But “don’t discount the value of bankruptcy,” said Fleischman. “Not necessarily to discharge the debt but to be able to wipe out other debt and free up some more money to take care of your student loans or to go into bankruptcy that involves a repayment over a period of time of a portion of your debt.”
It could be the opportunity you need to take a deep breath and reorganize your finances.
Legal help for your student loans
There’s no two ways about it: Student loans are complicated. Even picking the right repayment plan for your situation is tough. What’s best for you depends on what type of loan you have, your income, which state you live in, whether you’re married, and what your tax filing status is.
If you’ve defaulted or feel you’ve been wronged or harmed in some way, your course of action must be very specific.
“Jay and I face what is a very unfair system daily,” said Minsky.
Doing it on your own could do more harm than good. Instead, reach out to a student loan attorney to see what your options are.