The Credit Solution Copyright 2012 by Mike Roberts

Transcription

1 By Mike Roberts The Credit Solution Copyright 2012 by Mike Roberts

2 Copyright Information: Copyright 2011, 2012 by Mike Roberts All rights reserved. No part of this book may be reproduced, distributed, transmitted, stored in a retrieval system or used in any form or by any means, whether electronic, mechanical or digital, except as may be expressly permitted by applicable copyright laws or as expressly allowed by the publisher or the author in writing. Publisher Information: Published by Smart Consumer Solutions, LLC, 601 Van Ness Ave., STE E869, San Francisco, CA Disclaimer: All of the information contained in this publication is true and accurate according to the best information available to me at the time of publication. Please understand, however, that laws and credit industry practices and procedures are constantly evolving; so you should independently update laws, practices and facts before you take action. I do not accept any responsibility for errors or mistakes of any kind, or for any damages or losses that might result from the use of any information provided. Also, I am not a lender, a collection agent or a credit reporting agency. I am not an accountant or an attorney, and nothing in these materials is intended as professional advice. It is personal opinion only. I am providing it to you without any warranties or guarantees whatsoever. To obtain advice as to the tax or legal consequences of any action covered in these materials, or any action that you might consider based on these materials, you should consult an attorney, an accountant, or both. What I have tried to do here is simply offer solid, useful information that I have obtained through my own personal and business experience. Any action you choose to take based on any information that I provide, including forms and other attachments, is entirely your responsibility. 1

3 Contents Introduction... 3 The goal of this report... 4 Walking away isn t an option... 5 Bankruptcy won t erase your student loans... 5 Cancellation probably isn t available either... 6 Loan repayment options... 7 Deferment/Forbearance... 7 Deferment... 8 Forbearance... 8 Consolidation... 9 Advantages... 9 Limitations Rehabilitation Student loans and your credit rating Loan repayment is OK Rehabilitation is much better How to find the money for rehabilitation How rehabilitation works Some final points on rehabilitation Conclusion

4 Introduction Back when John Kennedy was President, a high school graduate with good grades could attend a name-brand college or university without breaking the bank. In those days the annual bill for tuition, room and board at a good school ran somewhere between $1,400 and $2,300. That wasn t necessarily cheap (in 1960 dollars), but it was low enough that you could get a degree without going into debt. This was true even if your parents weren t rich. That was then. It s a very different story now. Today if you re an in-state student attending a public institution you can expect to pay around $22,000 per year for tuition and other necessary expenses, and that s considered a bargain. If you re out of state, or if you re enrolled in a private school, you can count on paying twice as much. These are numbers that make higher education simply unaffordable for most people. And the need for a quality education has kept pace with the rising costs. Now more than ever, you have to get a certificate or a degree if you want to land a really good job and enjoy a stable, financially rewarding career. In the words of Lennon and McCartney, an education is your ticket to ride. So what do you do if you need a good education and neither you nor your parents can write a check to pay for it? The answer is simple: You go into debt. You borrow the money to go to school. Sure, you do your best to borrow as little as possible (you apply for some tuition aid here, you work a part-time job there), but still you borrow. With college costs as high as they are these days, you have no choice. If you re lucky, you don t end up borrowing too much. You get your degree, find a good job, and make payments that you can comfortably handle. Within a few years the payments are history, your student debt is gone, and you re on your way. But fewer and fewer people are so fortunate. According to the Wall Street Journal, two-thirds of today s higher education students borrow to pay their bills; and by the time they graduate, they owe an average of some $23,000. Many, especially graduate and professional school students, take on six-figure debts. If you have student loan debt that you can t pay, then this report is here to help you. In the following pages I m going to discuss what your options are if 3

5 you can t pay your student loan(s), and I m going to show you how to avoid trashing your credit as you work your way through your options. The goal of this report As you probably know, student loans come in a dizzying array of types and flavors. Some are subsidized by the federal government, and others are not. Sometimes the federal government is the lender, sometimes the school loans the money, and sometimes it s a private lending institution. Each program has its unique features; they all have their strengths and their weaknesses. In this report, I m not going to get into which loan programs might be best for you; and I m not going to describe any of them in detail, at least as far as their requirements and merits are concerned. There are two good reasons for this: 1. There is already plenty of solid, detailed information available about all the various loan programs, how they differ, and how to apply for them. Here are just a couple of the excellent resources available: (a website operated by the U.S. Department of Education), and (a privately published site that has a wealth of information. You can go to these sites, and to some of the links on these sites, and find out everything you could possibly want to know about the pros and cons of these various programs. 2. I m assuming that you have already made your loan program choices, and that you have already borrowed your money. A long discussion now about why you should have taken another path or chosen a different option isn t going to help you. If you re reading this report, you re probably not starting out in the student loan process. You re past that. You ve borrowed the money, you ve finished your schooling, and you re in the pay back phase. You re either having trouble making your student loan payments right now, or you see trouble on the horizon. My goal here isn t to help you choose the right loan; it s to help you figure out how to handle repayment as effectively as possible, and to keep your credit intact while you do it. 4

6 But let s deal with one obvious issue before we get any deeper into this. Is there any way to get rid of a student loan without paying it at all? Walking away isn t an option It would be terrific if there was a way to just make your student loans disappear; but as a practical matter, there isn t. With many kinds of debt, if you can t pay you can just lay low and wait for the statute of limitations to expire on your loan. Eventually the lender gives up and leaves you alone. This won t work with student loans. Why? Because there is no statute of limitations on student loan debt. Your lender can keep trying to collect forever. In very rare circumstances, it is possible to get a student loan forgiven (wiped out); but you have to meet some incredibly tough criteria. Believe me; you don t want to meet these criteria. If you do, your student loans are the least of your problems. Bankruptcy won t erase your student loans What about bankruptcy? It s there to wipe out debt, right? Well, it s true that the purpose of bankruptcy is to clean out debt and give folks a fresh start; but certain kinds of debt survive the process. Tax debt is one of those kinds, and unfortunately, student loan debt is another. You should assume that you ll have to repay your student loans even if you go through bankruptcy and get rid of all your other debt. This isn t good news, but it s the truth in almost every case. The reason isn t complicated. The federal government is deeply involved in student lending. In both subsidized and unsubsidized loan programs, the government guarantees the loans. This means that if a loan goes into default, the government must write a check to the unfortunate lender. When that happens, the lender s mood improves, but now the government is out the money and it doesn t like that at all. To protect itself, the government has made sure that defaulted student loans don t get discharged in bankruptcy. This was easy to accomplish because Congress writes the bankruptcy rules. They decide which types 5

7 of debt are eligible for discharge in bankruptcy and which are not. Student loan debt is not wiped out in bankruptcy for the same reason that income tax debt is exempt from discharge. This is money owed to the government, and the government intends to collect it. There is one exception to this general rule. It is technically possible to have a student loan discharged in bankruptcy, but only if you can convince the bankruptcy judge that forcing you to repay the debt will impose an undue hardship on you and your dependents. This undue hardship test is extremely difficult to meet, and the requirements are technical. Don t try this on your own. If you think you might want to file bankruptcy, then discuss this undue hardship option with your attorney and make sure he or she is on board and ready to plead your case for you. You should understand at the outset that meeting the undue hardship test is a long shot. To have your student loan discharged in bankruptcy, you must be able to show, with clear and convincing proof, that you and your family are locked in a spiral of poverty from which you will never escape. It has to be obvious that if you are forced to repay your student loan, you and your dependents will be deprived of the necessities of life indefinitely. You have to show that you made regular payments over an extended period (five years or more) before you filed bankruptcy. If you re an ordinary, competent person with some reasonable hope of bettering yourself over your lifetime, you re probably not going to meet the undue hardship test. Cancellation probably isn t available either Under federal law and the rules of the Department of Education, student loan lenders will cancel a loan under certain, very special circumstances. Unfortunately, you won t qualify for this solution to your problem unless 6

8 You can t pay because you are terminally ill, or because you are totally and permanently disabled (you have a serious physical or mental impairment that makes you unable to earn income doing anything); You can t pay because you have died; You don t have to pay because you have somehow managed to convince your bankruptcy judge to discharge your debt; or Your school closed while you were attending and before you could finish your studies. These are the main reasons why people are able to have their loans cancelled. There are one or two others that almost never apply. You can learn more about the details here: Again, if you re an ordinarily capable person with the ability to provide for yourself, cancellation isn t going to be an option for you. Loan repayment options OK. Let s assume that you re not going to be able to just walk away from your student loan debt and forget about it. All is not lost. Even if you can t make your payments, you ve got some options. Depending on your circumstances, you might be able to get your payments deferred, get a forbearance agreement from your lender, consolidate your loans, or work your way through a process called loan rehabilitation. Let s look at each of these options in more detail. Deferment/Forbearance Both deferment and forbearance provide some temporary relief because they both let you suspend your payments for a specified period of time. They are not the same, however; and you decide to go this route you want deferment if you can get it. Here s why: 7

9 Deferment With deferment, as with forbearance, interest on your loan continues to accrue during the period when you suspend your payments. But if you defer a federally subsidized student loan (a Federal Perkins Loan, a Direct Subsidized Loan, or a Subsidized Federal Stafford Loan), then the government pays the interest during the period when you re not making your payments. This excellent feature is the key benefit to deferment. If the government pays the interest during the deferment period, then that interest isn t added to principal later. Let s say the balance on your loan is $10,000 when the deferment period starts. If the government picks up the tab for the interest while you re not making payments, then you ll still owe $10,000 when the deferment period is up (instead of maybe $11,000 or $12,000). You can apply for a deferment if you are still in school, or if you ve enrolled in graduate school or an approved disability rehabilitation program, and the deferment will last as long as you stay enrolled. You also can apply if you re unemployed, but the deferment will last for three years at the most, whether you get a job or not. Forbearance If you don t qualify for a deferment (you re not enrolled at an accredited school and you re not unemployed) you still might be able to suspend your payments for a period of time by applying to your lender for forbearance. Under some circumstances, your lender will be required to grant forbearance. This will be true if You re in a medical or dental school residency program, You re monthly student loan payments total more than 20% of your gross monthly income, You re involved in national or community service, You re teaching in a qualifying education program (serving low-income or disadvantaged populations), or 8

10 You re in the National Guard and you ve been called up. If you don t meet one or more of these criteria, you still might be able to get a forbearance deal; but your lender will have some discretion to say no, or to agree to suspend only a part of your monthly payment. The main thing to remember about forbearance is that you are responsible for whatever interest accrues during the payment suspension period. This means that you will eventually have to pay it. Let s say you owe a balance of $10,000 when you suspend your payments, and that you stop paying for 12 months. If your interest is 6%, then you ll run up accrued interest of $600 during the suspension period. When you start paying again, your principal balance owed will be $10,600 instead of just $10,000. This means that your payments will go up, or that you ll need to take longer to repay your loan. This is the critical difference between deferment and forbearance. To get more details on applying for both deferment and forbearance, and for a review of the fine points about how these programs work, go here: Consolidation This is an option if you have more than one student loan, and the combined total of all your monthly student loan payments is more than you can handle. This is an increasingly common situation, and if you find yourself in this boat, you need to weigh the pros and cons. Advantages 1. You ll have a single monthly payment that is lower than the total of the payments you re making now. This is more convenient, and it will be more affordable in the short run. 9

11 2. You might be able to significantly extend the period of repayment, thereby driving the size of the monthly payment even lower. 3. If some or all of your current loans have a variable interest rate, you might be able to lock down a single, fixed rate. 4. Flexible repayment plans are available, including plans that are tied to your income stream (ability to pay). You also can switch repayment plans during the life of the loan. 5. Most types of student loan are eligible, both subsidized and unsubsidized. Limitations 1. You can t include a loan in consolidation unless you have either started to make payments on that loan or you have entered the grace period (you ve finished your studies and your payments will soon start). 2. Consolidation is expensive. There are no fees to apply and sign up, but it will cost you more in the end. It s true that your consolidated payment will be lower than the total of your individual loan payments, but the combined total of all your consolidated payments will be greater (depending on the repayment plan you select, maybe a lot greater). 3. Finally, and I think most importantly, you need to understand this: Consolidation is not a good solution for a loan that is in default. Though it is technically possible to consolidate a defaulted student loan, I strongly recommend that you avoid it. I ll cover the reasons for this in the next section. For more on consolidating student loans, including a complete list of the kinds of loans that are eligible, go here: Rehabilitation If you re like most people, your education ended up costing you more than you thought it would. That s history. What s done is done; but now you ve got more student loan debt than you ever expected, and your job (if you have one) 10

12 doesn t produce enough cash to cover your student loan payments (not after you ve paid your rent, your car payment, your grocery bill, etc.). You ve missed some payments, and now you re in default on one or more of your student loans. This is not good, and the consequences can dog you forever. There is no statute of limitations on unpaid student loans. Student loans and your credit rating Student loan debt is just like any other kind of debt in one important respect: If you don t make your monthly payments, the late payments and default entries show up on your credit report. Your credit rating goes into the tank. Your account goes into collections. These negative entries will continue to show up on your credit report and affect your score for seven years, even if you start making your payments on time or repay the loan in full. So what can you do to avoid these consequences? Loan repayment is OK Of course, if you happen to have the money (a rich relative has left you a windfall, or you recently won the lottery), you can just send a check to your lender for the outstanding balance on your loan. The obvious benefit is that you won t have this payment to worry about in the future, but paying your defaulted loan in full won t remove the negative entries on your credit report and restore your FICO score. Rehabilitation is much better There is a better way, even if you have the cash to pay off your all of your student loans right now. Through rehabilitation you can Get your defaulted loans reinstated (regain your in good standing status with your lenders), Get the negative entries removed from your credit reports, and Regain your eligibility for more federal student aid if you later decide you need it. 11

13 As you can see, the results with this approach are pretty good. Before you get too excited, though, you need to understand two very important points about student loan rehabilitation: 1. It takes time. We re not talking about a quick fix here. We re talking about several months. You should assume that it will take a year or so for you to start this process, get through it, and begin seeing the benefits of rehabilitation. 2. It takes money. Loan rehabilitation is based on establishing a new payment history with your lender. You re going to have to make no fewer than nine payments on each defaulted loan, and you will have to make them on time, before your lender will reclassify your defaulted loan as in good standing. How to find the money for rehabilitation Great, I hear you saying. If I had the money to make my loan payments, I would be making them now and I wouldn t be in default! This is a natural reaction, and here s my response: The truth is that if you are unemployed right now, and you have little or no cash flow, this isn t going to work for you. You re not going to be able to rehabilitation your loan(s), at least not right now. But if you have some income (some... just not enough to cover everything including your student loan payments), then there is a way to rehabilitation your loan(s). So what is the secret? How do I do this? you re asking. Here s how. As you may already know, I ve been helping people deal with their overwhelming debt and get their financial houses in order for a long time. One of the programs I ve developed enables people to negotiate and settle their debt for a fraction of the amount owed. This program, called Settle Your Debts (For a Fraction of What You Owe), is primarily for people who are buried in credit card and installment loan debt, but it has a feature that can help you solve your defaulted student loan problem. 12

14 If you already own this program, then you have access to a method to enable you to Analyze your cash flow situation, and Find ways to free up money that you didn t think you had available. This method is exactly what you need to find the cash to rehabilitate your defaulted student loans. If you haven t picked up this program yet, you can find it here You ll want to find the included Personal Budget Form and the Expense Reduction Worksheet in the Appendix, and then turn to Chapter 3 for detailed instructions on how to use these forms. You don t have to use our program to help you work out a budget - as long as you figure out a way to make regular payments on your own, you can move forward with the rehabilitation process. How rehabilitation works Once you work your way through your finances and determine exactly how much you actually can afford in monthly student loan payments for the next year or so, you re ready to start the ball rolling. You contact your lender and work out the payment plan. You have to make the first move. You need to contact your lender and state your desire to rehabilitate your loan. Student loan lenders know what this means, and they know they are required by law to cooperate with you. The two of you will then have a conversation about how exactly much your rehab monthly payment will be. Here are some points to keep in mind: The lender is required to let you into the rehabilitation program, but it is NOT required to just accept whatever you offer as a monthly rehab payment. The amount of the monthly rehab payment has to be reasonable and affordable. This means that you have to be able to afford the payment after you pay your rent, utilities, food and other necessary living expenses. In many cases this means that the rehab payment will be quite a bit less than the payment originally required (the one you couldn t 13

15 make). In some cases, it will be more. The lender is entitled to require proof of your finances as part of the monthly payment negotiations. They don t have to take your word for it. Regardless of what the lender asks for in terms of proof, you need to be sure you can free up the money to make whatever payment you agree to. This is where the budget/expense reduction process really comes in handy. You only get one chance to rehabilitate a student loan, and you don t want to blow it by agreeing to something that you simply can t do. Get the rehabilitation agreement in writing. Again, you can t leave anything to chance here. You can t afford any misunderstandings about what you have agreed to do. Start making your payments. Once you have everything all buttoned up, send in your first monthly payment, and be sure to get it there on time. You re going to have to make nine payments over a ten-month period in order to rehabilitate your loan. These payments must be voluntary. This means that any payments taken from you without your consent (payments made through wage garnishment or federal withholding of your income tax refund) don t count. You can t afford to be late on any of these (late is defined as more than 20 days after the due date). The nine payments will rehabilitate your loan. Once you ve made the nine payments on time, you ll receive confirmation that your loan is rehabilitated. In some cases, there will be an interim step where your rehabilitated loan is sold to a new lender. Whether that is true in your case or not, you ll receive paperwork stating that your loan is once again in good standing and that you will now be required to make future monthly payments in a certain amount. At this point All record of the negative late payments in your credit report are removed completely; Collection activities, including wage garnishment and tax refund withholding, stop; 14

16 You are once again eligible for other student loan programs and benefits. Now you can consolidate. Remember when I said that consolidation is not a good solution for student loans that are in default. This is because of how consolidation works. When loans are consolidated, a new lender pays off the existing loans and replaces them all with a single, larger loan. If a loan in default is consolidated, then Your old lender (the unhappy one, the one you have not been paying), just pockets the payoff, closes the book on your loan, and notifies the credit bureaus that the loan is finally paid. Your negative entries, including the statement that the loan was once in default, REMAIN IN YOUR REPORT. Your credit score continues to suffer. But once your defaulted loan is rehabilitated, and is no longer in default, it is safe to consolidate. Once the negative entries disappear from your credit report, you can apply for consolidation and get all your payments rolled into a single affordable payment. Some final points on rehabilitation First, you might find that the nine payments required for rehabilitation will be at least as large, or larger, than the payments you previously struggled to make. This is sometimes the case. If this happens to you it will be because your monthly income and expenses are such that the lender is permitted to require a larger payment. Second, regardless of the size of your nine required payments, you might find that the payments required thereafter are substantially higher payment than those you were making before. This is because accrued interest and collection costs are normally added to the new principal balance, and the term of the loan (the repayment period) stays the same. If this happens to you and you can t afford the larger payments, you ll want to seriously look into consolidation. Third, if you later default on a loan that you have rehabilitated, you won t be allowed to go through the process again. Rehabilitation is a one shot deal. Finally, rehabilitation is not available on loans if a court has entered a judgment in favor of your lender. 15

17 Conclusion I hope you have found this report on student loans helpful. If you re having trouble paying back the money you borrowed for your education, you are not alone. Millions of Americans have the same problem. Except in rare cases, student loan debt must be repaid. Fortunately, there are ways to defer payments during difficult times, or to consolidate loans and thereby lower payments and extend the repayment period. Through rehabilitation, it is even possible to cure credit problems caused by defaulted student loans. 16