Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
I want to know if I can go back to school even though my student loans are in default. — Larissa
Not only can you return to the hallowed halls of higher learning, I think you should! It may be tough to pay for tuition, books and living expenses without student loans, but some people have made it work. In fact, CreditCards.com has interviewed Zac Bissonnette, author of “Debt-Free U” about how students can graduate in the free and clear. Check it out.
What you can’t do, Larissa, is get more federally guaranteed student loans to pay for your education while the ones you have are in default. So if you want to borrow more money for college, you’ll have to clear them up. It’s very important to get the loans back in good standing anyway, since the consequences of default are just awful. For example, the entity that is holding that debt now may:
- Garnish up to 15 percent of your net wages. They don’t even need to take you to court to start, either — they’ll present your employer with a wage garnishment order (sometimes called an earnings withholding order). If you don’t make much, you could keep some of your pay, since they can’t take more than the equivalent of 30 times the current federal minimum wage. Most people, however, find any reduction in earnings a major hardship.
- Take your tax refunds. Don’t get too excited about receiving that big end-of-year tax refund. As with the garnishment, they can just begin to intercept what the government owes you in overpayments.
- Sue you. Having a defaulted loan on your credit report is bad enough, but how would you like to have a judgment out there in the public record as well? It can happen if you are taken to court over this debt. If you are sued for nonpayment you will probably lose the judgment, and the amount you owe will increase.
- Cause long-term credit damage. There is no statute of limitations on collections for student loans, and the default notation will remain on your credit report until you either rehabilitate it or pay it off.
Also, if your loans have landed with a collection agency, the company will have added a fee to the balance and your interest rates will have zoomed up. That makes it more expensive and difficult to repay, of course, and the collection techniques can be pretty nasty. Therefore, if you do begin to get calls, make sure you understand your rights by reading over the Fair Debt Collection Practices Act, a federal law that governs third-party collectors.
So that’s what can happen if you let the loans linger in bad credit land. Inspired to get them out of default now and collect federal financial aid for school? Good. You can do so by paying the amount you owe in full. If that’s not possible, take steps to rehabilitate the loan. You can do that by contacting the loan’s holder, and making at least six monthly agreed-upon payments. After that, you may qualify for new student loans, but you must continue to send payments on the old ones on time, otherwise you may forfeit the deal. Your loans will be rehabilitated after you’ve made at least nine full payments over a 10-month period. At that point the default notation should be lifted from your credit reports and you may be eligible for a deferment or forbearance.
And if possible, don’t wait until the loans are back in good standing to resume classes. It’s hard to regain lost momentum. Maybe your parents will help out or you have savings or a job that can pay for the bare minimum? Explore all possibilities.
Meet CreditCards.com’s reader Q&A experts
Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com’s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.