IBR, ICR, and PAYE – the income driven repayment plans:
These three plans, Income Based Repayment (IBR), Income Contingent Repayment (ICR), and Pay As You Earn (PAYE), are all based on your income. That means low income earners, or those on social security, can qualify for an exceptionally low monthly payment – even as low as ZERO! You don’t need deferments or forbearances anymore just because you have low income. Unemployed? No deferment needed! Get on one of these plans and your payment is ZERO! Plus, as an added bonus, if you’re on any of these plans for 25 years, your loan balance is forgiven at the end of your 25th year. While the balance forgiven is taxable, you have 25 years to plan. How old will you be, what will your income be, and will you even care? Yes, Virginia, there are affordable repayment plan!
Wage garnishment without a lawsuit:
You don’t need to be sued to have your wages garnished for a default Federal loan. Would you believe I still get folks who don’t know this? I get irate borrowers wanting to know how to undo a garnishment because they haven’t been served properly and can’t find any record of a lawsuit. I’ll repeat – NO LAWSUIT NEEDED. These are called Administrative Wage Garnishments – administrative because the law allows garnishment with a simple 30-day warning letter. No Judge or jury needed. No proof of contract (though you do have the right to a hearing – but that’s a completely rigged system, something for another blog). If you default on your Federal loan(s) and you are a W-2 wage earner, watch your mail carefully. Once you receive that 30-day warning letter, you better act fast if you want to avoid that garnishment. Have you moved? Have you updated your new address with your most recent servicer? If not, you won’t get the warning letter. Instead, you’ll get a lovely surprise via your paycheck, which could be missing as much as 15% of your pay. OUCH! Don’t wait – see #1 above and stay out of default!
Private loans can’t do squat – without a lawsuit:
The most important difference between a Federal loan and a private loan are the powers to collect upon default. Fed loans have administrative powers, no lawsuit needed. Private are just the opposite – nothing can happen without a lawsuit, except for those annoying debt collection calls (which could be worth money to you if you catch the debt collectors violating your rights!). Can a private lender touch a tax refund, be it state or Federal? NEVER. Can a private lender offset social security? NEVER. Can a private lender garnish wages? Yes, but only if they sue, they win, and your state allows it (there are a few states that don’t allow this kind of wage garnishment). You’re odds of survival are not nearly as bad as you’ve been lead to believe.
Your credit isn’t as important as you think:
I can’t tell you how annoyed I get with borrowers barely surviving, who find a way to pay their private student loan while putting their Fed loan in deferment and skimping on other necessities. Folks, the private lenders don’t give a damn about you, why do you care about them? Credit? If someone is barely surviving, credit is the last thing to worry about. Barely surviving means a person is not in a position to buy a house, a car, or even worry about credit card debt. That means credit isn’t needed. And as for job background checks, who hasn’t defaulted on a private student loan? If you are denied a job because of a private student loan, great! Let the lender know, “Gee, I’d like to pay, but I can’t get a job because I defaulted on your loan because you won’t work with me.” You fix this situation by: 1) Getting your Fed loan on an income driven payment plan (see #1). 2) Paying for necessities, 3) Letting your private loan go (think Frozen). Seriously, just let the damn thing go. See #3 if you need help.
…but what about my co-signers?
Your co-signer committed to helping you pay back the loan(s) – at least that’s what the promissory note says. I don’t care what promises you and your co-signer arranged. You’re both on the ship together – if it goes down, you BOTH go down. Your co-signer can’t sue you for screwing up. (Are you a co-signer reading this? Pay close attention!) If a co-signer wants to claim that the borrower promised to make all payments and that the co-signer never intended to make a single payment, the co-signer has committed fraud upon the bank. Signing that note was a promise to the bank that the signer and/OR the co-signer would make payments. A co-signer never intending to make payments lied when signing – that is fraud. So, co-signer, you wanna do something about this? Get ready to start bailing. Of course co-signers are protected just like signers. Private lenders have to sue and win. If a co-signer is a retired individual living on social security, there isn’t much a judgment can do. Worried about credit? See #4.
There is a whole lot more to what you’re reading here.
Yes, there are exceptions and more details to know. I’ll attempt to continue this list to fill in the gaps at a later time. Questions? Consult a student loan lawyer.
Knowledge is power. Learn everything you can about student loans and you can win (or lose) on your own terms.
I have defaulted on an AES loan, Wells Fargo and this month I wasn’t able to pay Sally Mae. All are privates. Federal repayments haven’t kicked in yet (I have them on IBR). My aunt is willing to help me out financially if I can negotiate on a lower settlement offer. Should I call them and start haggling?
Sure, why not?
I am a regular follower of your blog. You said above that private lenders cannot touch your tax refund. I agree they cannot do so prior to getting a judgment. I believe that is what you were conveying, but I wanted to clarify that, at least here in Michigan, a creditor can file a form to intercept a debtor’s tax refund after obtaining a judgment against them. I believe it is solely the State refund. Thank you for all of the great information.
In these repayment plans, I like Pay As You Earn (PAYE). Is it really true that if anyone on any of these plans for 25 years, his/her loan balance will be forgiven at the end of his/her 25th year? Sounds really good. This is a informative article. Thanks for this article.
Yes it’s true, but with PAYE it’s only 20 years!