When To Get Your Loans In The Event Of Default Is A Bad Idea | Ranger student loan

According to recent data from the Department of Education, in the last quarter of 2017, nearly 23,000 borrowers defaulted on their student loans – for the second time. During the same period, just over 226,000 borrowers defaulted for the first time.

Given that these numbers have been fairly consistent every quarter over the past two and a half years, it’s safe to say that about 10 percent of all borrowers who come out of default end up defaulting again. According to the Consumer Financial Protection Bureau, many do it in just two years.

Failure to pay, even once, can have a devastating financial impact. Not only does this have a significant negative effect on the borrower’s credit report, it can also result in collection fees of up to 24% for most federal student loans and up to 40%. for federal Perkins loans.

Fortunately, borrowers can reduce these collection costs by consolidating or rehabilitating themselves in the event of default, but this won’t be of much benefit if they repeat a year or two later.

Let’s check the calculation. A student or parent borrows $ 45,000 in unsubsidized federal student loans at an interest rate of 4 percent and makes no payments and is deemed to be in default after nine months late.

After about two more months, the loan is transferred to a collection agency, where the agency will begin to attempt to collect the loan. At this point, the loan has been bearing interest for about five years, so the balance is about $ 54,000. By the way, this is why the Student Loan Ranger always recommends borrowers pay their interest while they are in school.

If the borrower does not make a repayment agreement with the collection agency after 60 days, the agency may add a collection fee. Twenty-four percent of $ 54,000 equals almost $ 13,000, so the balance is now almost $ 67,000. Take a moment to appreciate how quickly a loan can increase by a third in total.

This new balance would also increase the standard monthly payment of $ 456 – with a total repayment after 10 years of $ 56,000 – to $ 678 with a total repayment of $ 81,000. That’s why when borrowers tell us they can’t afford their student loans, we insist they can’t afford not to.

Now imagine that this borrower rehabilitates his loan. Many borrowers are able to rehabilitate their loans with payments as low as $ 5, due to their financial situation. For this example, we will use this amount because borrowers in this situation may be the most at risk after default.

Rehabilitation requires payment on time for nine consecutive months. Five dollars a month won’t reduce the loan total much, especially when you’re racking up close to $ 200 in interest per month. So even with the significant reduction in collection costs, by the time the rehabilitation is complete, the balance is still around $ 63,000.

Now let’s say this borrower cannot make his payments after the rehabilitation. He will find himself in the same situation the following year, but with an outstanding balance of $ 65,000 and a balance of post-collection charges of over $ 80,000. For example, a student loan balance can almost double just seven years after borrowing and only three years after repayment begins.

Rehabilitation and consolidation are great tools to help delinquent borrowers get back on track, regain their eligibility for student loan benefits, repair their credit, and end wage and salary garnishment. tax refund. This is only true, however, if the borrower is confident that they can pay the student loan repayments once the loan is in good standing again.

One way to find out is to use the Department of Education’s reimbursement estimator to see if any of the payment plans will fit your budget.

Many borrowers who rehabilitate themselves complete financial hardship documents to help them determine the amount of their pardon payment. These hardships take into account a borrower’s expenses, such as shelter and food, which is the number of people who end up with a $ 5 pardon payment.

The problem with this benefit is that no repayment option takes into account the expenses of borrowers once they are in default. The other problem is that borrowers can only use pardon once per loan, so if the loan defaults again, that option is no longer on the table.

If you are considering consolidation or financial hardship form as part of the rehabilitation program, because you cannot afford the initial rehabilitation payment that was offered to you, you should definitely make sure that there is a recovery plan. payment that will match your budget after the default.

If not, you may want to consider paying each month what you can afford the loan holder – this will help delay payday garnishment actions – until you are. in a situation where you are sure you can maintain your payments once you are in default. To be in default is certainly not a good thing, but to come out only to redo default is even worse.

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