Ask The Money Coach

Posts Tagged ‘student loan consolidation’

Consolidating your loans likely will be your best short-term option — at least once you start out working, because your initial student loan repayments are going to be gigantic. I’ll tell you exactly how much in just a moment. But you have an enormous amount of student loan debt, and unfortunately it sounds like you’ll have to borrow more (or are contemplating doing so) while you complete your residency. Although you will likely earn a good salary once you are done with your residency, I would caution you against getting even more indebted. The reason is simple: You are already facing massive student loan repayments. I ran some numbers for you, using the calculators at www.finaid.org. Based on the information you gave me, I took an average of your interest rates and plugged in a 7% rate for all your loans. Here’s what I found:

* The 10-Year Standard Loan Repayment Program
If you stick to this program, you will be required to repayment $3,483.25 a month for 120 months, or 10 years. You will pay an additional $117,990.76 in interest charges for a cumulative total of $417,990.76 in student loan payments. According to FinAid’s estimates, you will need an annual salary of at least $417,990 to be able to repay this loan. This corresponds to a debt-to-income ratio of 0.7. Also, this estimate assumes that 10% of your gross monthly income will be devoted to repayment of your college debts. Using 15% of your gross monthly income to repay your student loans means you will need an annual salary of $278,660; that works out to a debt to income ratio of 1.1.

* The Extended Loan Repayment Program
If you consolidate your loans and stretch them out over 30 years, you will have to pay $1,995.91 a month for 360 months, or 30 years. While the monthly cash outlay is less in the extended repayment option, recognize that you will pay far more money overall. Under this program, your total interest paid will be $418,524.53, according to FinAid, bringing your total amount of loan repayments to a whopping $718,524.53. FinAid’s calculators also stated that you need a yearly salary of at least $239,509.20 to afford to repay this loan using 10% of your gross sslary, with a debt to income ratio of 1.3. If you use 15% of your gross monthly pay, you’ll need a salary of $159,672.80, which corresponds to a debt to income ratio of 1.9.

As you can see, unless you’re completely rolling in the dough as soon as you begin working full-time, you will likely have no option but to stretch out your payments, just so that they will be remotely affordable. One other benefit of consolidation is that you will likely be able to get a lower rate than you are currently carrying on your loans. Therefore, to refinance and get the advantage of a lower rate via loan consolidation, visit the Department of Education. Visit the department at: loanconsolidation.ed.gov.

Lastly, there are a few other things you can do to make your student loans more affordable or to eliminate them more quickly. You can pay extra payments on consolidated loans. That will decrease the interest charges you pay over time. You can live modestly, so that you have more money to put toward your college debt. You can see if a potential or future employer might be willing to pay off some of your student loans. And you can investigate various student loan forgiveness programs that are offered to people in the medical or healthcare fields.

I give more tips on all these strategies in my book, Zero Debt for College Grads: From Student Loans to Financial Freedom.

It sounds like your student loan is obviously delinquent, and possibly already in default status. When you have such overdue loans, you are subject wage garnishments and seizure of tax refund checks. The only way to prevent these two things is to work out a directly deal with your lender or loan servicing company or use one of four common methods to clear up delinquent student loans. Read more on these strategies below.

How to Fix Defaulted Student Loans and Wage Garnishments

In this tough economy, an increasing number of college graduates (and college drop-outs) are falling behind on their student loans. According to the Department of Education, federal student loan defaults were up to 6.9% in 2009, well above their 2008 of 5.2%. For those carrying private loans, defaults hit 3.37% in 2008 versus 1.47% in 2006, according to Sallie Mae, one of America’s largest providers of private loans.

As you probably already know, defaulting on a student loan is a very serious matter. A federal college loan falls into default status if you are supposed to make monthly payments, but have not done so for 270 days. For those whose student loan payments are less frequent, a default occurs once you haven’t made payments for 330 days. In either case, the government has the right to take your federal tax refund check or garnish up to 15% of your disposable pay in order to collect on a defaulted federal student loan. Defaulted student loans also negatively impact your credit.

Appealing a Wage Garnishment

The good news is that you can appeal a wage garnishment and request a hearing on the matter in order to demonstrate why it is that you can’t afford that the payments and wage garnishment your lender or guaranty agency is seeking. The U.S. Department of Education Debt Collection Services Office (DCS) holds the hearing after you fill out a “Request for Hearing” form regarding your wage garnishment, and send it to the Department of Education. Find the document online at: www.ed.gov/offices/OSFAP/DCS/forms/Request.For.Hearing.pdf

Your hearing can be done in-person, over the telephone, or in writing; the choice is up to you.

IMPORTANT NOTE: When you submit your Request for Hearing, make sure you also send another EXTREMELY IMPORTANT document. It is the “Financial Disclosure Statement,” a 3-page document in which you must document your income and itemize all your expenses. Here is a link to the document online: www.ed.gov/offices/OSFAP/DCS/forms/fs.pdf. This “Financial Disclosure Statement” form will be critical in the hearing/appeal process, and will be closely evaluated, so take the time to carefully list all your bills, and provide copies of those bills as requested.

On page 3 of the Financial Disclosure Statement, you will notice a line that says: “Based on this Statement, I think I can afford to pay $               per month.” This is where you have an opportunity to essentially offer a counter-proposal to the Department of Education about your student loans. Regardless of what you’ve been asked to pay in the past, here is where you should realistically evaluate your budget and come up with a number that you can undoubtedly pay (without a huge financial strain) month after month.

The Department of Education will make a decision about your case within 60 days after your hearing. But in the meantime, any wage garnishment that has already started will continue to be in force.

Four Options to Cure a Defaulted Student Loan

Now, in order to get your student loan(s) out of default, you have four options:
•           Consolidate the loan(s)
•           Enter a loan rehabilitation program;
•           Pay the loan(s) off completely
•           Get the loan(s) totally discharged or cancelled

The last two are probably not realistic options. I know you don’t have the money to pay off the loan(s). That’s why you’re in this predicament; and loan cancellations are rare (though they can be obtained).  You’ll likely have to “rehabilitate” your loan(s) or consolidate.

Should You “Rehabilitate” Your Loans or Consolidate?

Before you can consolidate, you have to bring your loan(s) out of default status. You do this by making just three monthly payments — on time, and in any amount that you and your lender agree upon. To find out if you qualify for loan consolidation, contact the Federal Direct Consolidation Loan Info Center at 800-557-7392 or go online to loanconsolidation.ed.gov.

If you call, the staff there should be able to tell you what your monthly payment will need to be for those three months while your loan is in repayment. The one drawback to consolidation is that your credit remains tarnished. Even though your loan will be paid off and listed as “paid in full” on your credit report, you’ll get a new loan through consolidation and that previous default still shows on your credit report for seven years.

An alternative, to fix your credit, and have all past negative information about your student loans completely deleted from your credit file is to go through loan rehabilitation. In a nutshell with rehabilitation you make 9 or 12 on-time payments on your student loans in an amount you can afford. You make nine monthly payments on Direct Loans and Federal Family Education Loans, or 12 monthly payments on Perkins Loans. This, in my opinion, is the preferred route as it will help you restore your credit in a big way, so your past default won’t haunt you for years to come.

For more details about various alternatives to cure your student loan delinquency, check out the Department of Education’s guidebook called “Options for Financially-Challenged Borrowers in Default.” Here is a link to the guide online: www.ed.gov/offices/OSFAP/DCS/forms/2004.Borrower.Options.pdf

Get Help From an Ombudsman

Additionally, you should know that if you ever have a dispute with your lender or loan servicer about anything related to your federal student loans, there is a government agency that may be of assistance in resolving that dispute. It’s called the Federal Student Aid Office of the Ombudsman (www.ombudsman.ed.gov). Always try to work things out first with your lender by using this online “Self Resolution Checklist” from the Ombudsman’s office: ombudsman.ed.gov/resources/toolschecklists/selfresolution-checklist.html. But let’s say you think your loan was mistakenly placed in default by your lender – maybe you were in school at least half-time, you had a loan deferment or forbearance, or you actually made payments on your loan – and you can’t get a satisfactory resolution of the issue, then it’s time to reach out to the Ombudsman’s office.

Here is a link to the section of the Ombudsman’s website that gives you more information about handling defaulted student loans: ombudsman.ed.gov/loandefault.html. Also, this link gives you more info about wage garnishments: ombudsman.ed.gov/garnishment.html.

No matter what economic challenges you’re facing, you don’t have to live with wage garnishments and blemishes on your credit report because of defaulted student loans. Reach out for help today, and start the process of turning that college debt problem around.