Student loans in default: What are your options?

Without a diploma, repayment becomes even harder

By Todd Ossenfort

The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question 'The Credit Guy' archives

Dear Credit Guy,
I built up a huge student loan, and I cannot pay it. I dropped out of college and now make $200 a week. I keep getting calls, but I just don't make enough money. What can I do? -- Kate

Dear Kate,
First of all, I recommend you communicate with the lender(s) and find out what repayment options are available to you. Most government lenders have many different avenues to help repay student loans when there are obstacles in the way of doing so successfully. However, if you wait until the loan is in default (no payment for nine months), you have fewer repayment options.

Private student loans are typically considered in default after missing one payment, but you would need to review your specific contract to learn what repayment options are available from your lender.

Unfortunately, whether you have a government-backed loan or a private loan, both are very difficult to discharge through bankruptcy. You must prove "undue hardship" to be eligible for bankruptcy protection with a student loan. It is very difficult to prove "undue hardship" unless you are physically unable to work and earn an income. However, some loans have been discharged through bankruptcy when the person can illustrate to the court he or she has insufficient income to pay the loan and that those circumstances are unlikely to change during the repayment period of the loan.

To add to the bad news, federal loan grantors have many different collection tools at their disposal. Your federal and state income tax refunds can be seized, your wages can be garnished and you can be prevented from securing a student loan or grant in the future.

So, what do you do?

Although it may seem counterintuitive, consider going back to school and finishing your degree. It will be easier to find better paying employment to repay the loan if you get your degree. The U.S. Census Bureau has released data proving the substantial value of a college education in the United States. Workers 18 and over sporting bachelor's degrees earn an average of $51,206 a year, while those with a high school diploma earn $27,915. But wait, there's more. Workers with an advanced degree make an average of $74,602, and those without a high school diploma average $18,734. It may be better to choose a much less expensive school so you will be adding the least amount to your already "huge" student loan debt. While in school, you should be able to defer payment until you graduate or for several months beyond graduation.

You can also search for a better paying job so you can begin to make small monthly payments toward the loan. Or secure a second job. You may even think about borrowing money from a friend or family member to make payments while you are seeking a better job.

Lastly, you might consider contacting an attorney who specializes in student loan default to help you determine if you could have your loan discharged through bankruptcy.

Take care of your credit!

See related: Take these steps to avoid wage garnishment, How to face a student loan debt disaster, Cure your defaulted student loan in six steps, 4 steps to settling privately funded student loans, Don't worry if resold student loan clutters up credit report

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: October 4, 2010

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