More than 44 million Americans are currently paying back $1.44 trillion in federal student loans. More than 1.1 million of those borrowers defaulted for the first time during 2016. Defaults are increasing because borrowers are not being given information that could help them manage payments. As a result, it has become very easy to make mistakes during the repayment process.
Fortunately, there are ways you can avoid making some of the most common mistakes while repaying your student loans. When it comes to repaying your federal student loans, knowledge is power.
Mistake #1: Not Setting Up Autopay
Setting up autopay with your bank and servicer can help you manage your monthly student loan payments. Instead of having to worry about remembering your payment due date each month, the funds would be automatically deducted from your bank account.
While autopay is very helpful for many borrowers, there are also ways to make mistakes with this option. The first mistake is to forget about auto pay. If you do not have the funds available in your bank account to cover with withdrawal for your student loan payment, then you may be hit with several overdraft fees. With some banks, these fees are $35 for each pending transaction. The second mistake is that you could forget to recertify your income-driven repayment plan, which would reset your monthly payments to what you payed under the standard 10-year plan. This could also lead to significant overdraft fees if you are using autopay.
You can avoid these pitfalls by finding ways to set reminders for yourself to meet your monthly payment deadline. In addition, you can also set a reminder to recertify for your income-driven repayment plan each year.
Mistake #2: Using Deferment of Forbearance During Economic Hardship
The Department of Education allows you to sign up for an economic hardship deferment or forbearance if you are experiencing temporary financial difficulty. However, these options may have major drawbacks. The Department of Education only allows you to use deferment or forbearance for a short period of time. In addition, compound interest could quickly accumulate and be applied to your principal balance.
Instead of putting your loans into deferment or forbearance, you should consider enrolling into an income-driven repayment plan. IBR, REPAYE and PAYE can cap your monthly payments to a percentage of your discretionary income. This means that if you are unemployed and not making money, your monthly payments could be $0. After your period of financial hardship has passed, you can recertify your loans using your new income information. You can also pay more than what is owed under your income-driven repayment plan if you come across some extra funds.
Keep in mind, that it is essential to recertify your income-driven repayment plan each year by the deadline.
Mistake #3: Avoiding Loan Consolidation When It Is Beneficial
There are some cases where it would make sense to consolidate your federal student loans into a Direct Consolidation Loan. Repayment options are much more generous if you have Direct Loans. For example, you may also be able to take advantage of certain loan forgiveness programs. If you have FFEL loans, you cannot take advantage of the REPAYE or Public Service Loan Forgiveness (PSLF) programs. REPAYE caps your monthly payments to 10 percent of your discretionary income whereas IBR (the only option for FFEL loans) might cap monthly payments to 15 percent. Since a Direct Consolidation Loan falls within the Department of Education’s Direct Loans program, you could become eligible for these repayment options.
However, there are also cons to loan consolidation that should be taken into consideration. For example, you may increase the period of time it takes to repay your debt. In addition, you may lose certain benefits or lower interest rates that you had with your old loans. If you are going to seek loan consolidation, it is essential to discuss the pros and cons with a professional beforehand.
Mistake #4: Going Into Default
The Department of Education will consider your loans to be in default if you do not make payments for a period of at least 270 days (Direct and FFEL loans). Defaulting is a big mistake, because it takes away your chance to use helpful income-driven repayment options. Not only do you lose these options, your loans become due in full immediately. Finally, the Education Department may also use an administrative wage garnishment to recover the defaulted loans. This type of wage garnishment does not require the approval of a court.
Taken together, these consequences will make repayment much more difficult. If you have Direct or FFEL loans and are falling behind on payments, it is essential to look into some of the options we have discussed above. To check which types of loans you have, you will need to access the National Student Loan Data System (also called the NSLDS). Once you have identified your loans, you can begin the process of selecting the best repayment options.
If you have already defaulted, then you may still have options to rehabilitate your loans. Depending on the situation, it may also be advantageous to seek a Direct Consolidation Loan. This will also bring your loans back into good standing within a short timeframe.
How Can a Bankruptcy Attorney Help with Student Loan Repayment Problems?
The Kansas City bankruptcy attorneys at The Sader Law Firm can help borrowers who are having problems with student loans. Whether you are struggling with payments or have already defaulted, our attorneys can help you learn whether you have options for debt relief or lowering your monthly payments.