LEGAL MATTERS: Why Paying Off Student Loans Matters More

Wednesday, February 13, 2013

John T. Longo, GoLocalProv Legal Contributor

If you're struggling with which debts to pay during tight economic times, don't trifle with your student debt. Here's why.

The legal consequences of failing behind on student loan payments - whether they are your loans or loans you co-signed or guaranteed for your children – are worse than missing payments on any other debts your probably have. Here’s why:

1. Filing bankruptcy usually wipes out credit card debt but it almost never wipes out student loans. (So it seldom makes sense to pay credit card bills instead of student loans.)

2. When federal student loans go into default, the lenders can do nasty things other creditors cannot. For example, they can often intercept tax refunds and garnish Social Security benefits.

3. Banks, credit cards and other creditors have to sue you before they can garnish your wages or seize your bank accounts. You will know you are being sued and have a chance to defend yourself or work out a payment plan. But student loan lenders often do not have to bother suing before they grab your money.

4. Once a loan goes into default, you get hit with a bunch of fees and penalties. You can get out of default by making payment arrangements but some of the fees and penalties never go away.

Dealing With Student Loans

The good news is help is available for students and parents with crushing student loan debts. The best place to start this web site maintained by the National Consumer Law Center. It will explain the four basic options for dealing with the loans:

Negotiating lower payments. For loans guaranteed by the federal government, and most are, the lenders generally have to offer you income based repayments which limits your monthly payments to 15% of your net income. (If you enroll in college after 2013, the limit is dropping to 10%.)
Having the loans cancelled. In limited circumstances, including extreme financial hardship or participation in certain programs that encourage student to work in public service jobs, some loan balances can be eliminated.

Obtaining a deferment or forbearance. This option does not eliminate the debt, or stop interest from piling up, but it does allow you to stop paying for a while if you re-enroll in school, are unemployed or you experience some other financial emergency.

Consolidate multiple loans. With this option, you may get a lower interest rate or a lower monthly payment by stretching the payments out over more years.

A Growing Problem

The Consumer Financial Protection Bureau estimates there is over $1 trillion in outstanding student loan debt. Billions of that is owed by students who never finished school or are working in jobs that don’t pay them nearly enough to make their monthly payments. As NBC Nightly News and the Wall Street Journal have reported, the growing default rate on the loans is hurting more than just the borrowers, it is also a drag on the economy.

Take Action

If you are considering borrowing money to pay for your education or your child’s, check out the Know Before You Owe Project.

If you want to help pass laws that will help people deal with existing loan debt, ’like’ this student loan reform page on Facebook.

John Longo is a consumer rights attorney practicing law in Rhode Island and Massachusetts. He represents consumers who have disputes with businesses, employees cheated out of their wages or overtime, car buyers stuck with Lemons, and people in need of bankruptcy protection. He is a member of the National Association of Consumer Advocates, the National Association of Consumer Bankruptcy Attorneys, and the Rhode Island Association for Justice.

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Comments:

Chris MacWilliams

9:08am on Wednesday, February 13, 2013

No mention of the Evening Division that Colleges offer so students can pay as they go. Does it take longer to get your degree by paying upfront for each class AND working during the day? It certainly does.

You have choices. Recognize that "instant gratification" can take a lifetime to pay for.