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Will I Be Okay Just Defaulting on My Federal Student Loans With Navient?

By on February 27, 2017

Question:

Dear Steve,

Consolidated student loans approx $80k.

Been in forbearance/unemployment forbearance for ever. It just seemed so easy to claim unemployment and forebear.

I cannot believe how easily it was to forebear, and now I’m kicking myself.
Recently started defaulting (I am 3-4mos behind)

I cannot afford payments, even interest only or lowest income.

Hubby’s income is substantial, but not enough to cover our expenses and any bill Navient sends my way.

Mortgage and cars are in my husband’s name; my dad was a co-signer for my loans years and years ago but he has nothing that they could take and doesn’t make much (and is close to retirement age)

I now work 25 hrs week, bring home ~200/week

$80k navient federal loans: I’m considering defaulting and waiting for (or asking for) a settlement offer. In preparation for this, I have consulted a CPA who prepared our taxes two different ways: married filing separately and filing joint.

If we file separately we will lose about $10k of our refund (I know, the IRS isn’t the place to save money… but that’s not the point of this forum) We use hubby’s tax withholdings to make up for my not working, and therefore rely on this refund yearly to make ends meet.

Once I am defaulted and ask for (or am offered) a settlement, will they ask to see tax returns before finalizing a settlement? Or will I be OK to just keep defaulting and take/ask for a settlement when the time comes if we file jointly?

I am under the assumption that our house and cars are safe, because they are in my husbands name – but is this correct assumption?

Again, I’ve exhausted all deferment options, and at this point even interest only is not affordable. Thanks for any and all input. I’m sick over this, barely sleep at night… seems like my only way out of this is dying and even that doesn’t seem to make them go away.

READ  My School Took Out a Navient Student Loan in My Name I Didn't Want

Thanks. Keep up the good work with the rescue dogs :)

Tara

Answer:

Dear Tara,

Thanks for reaching out to me. You’ll have to update me in the comments section below, because I have some questions.

You mentioned this was for a Navient federal student loan but also said your father was the cosigner. However, federal loans don’t have cosigners. Private loans do. Federal loans that are the responsibility of someone else are typically Parent PLUS loans.

If these are federal loans, the defaulting route is a non-starter. Don’t do it. You are more likely to have a wage garnishment, lawsuit, or the responsible party pursued, think father.

To figure out the status of the Navient serviced loan you should login to the National Student Loan Data System. If your loan is not listed here is it not a federal loan. That is a critical factor to first clarify. Again, let me know what you find out when you login there.

If I was to bet I’d say based on the frequent forbearance and cosigner that this is a private loan. We will just have to wait to see what you find out from the NSDLS site.

If this turns out to be a private student loan, please let me know if the loan proceeds were disbursed to you, used for anything other than tuition and books, and what school you went to.

One fact I want to leave you with is if your father is actually a cosigner on a private loan he is 100% responsible for the balance due. This is what cosigners agree to take on when they sign and assume the liability. And if this is a Navient private loan then he might be able to negotiate a cosigner release but for just a few thousand more dollars you can typically get the full private loan settled.

I’ll watch for your comments and updates.

READ  My Navient Student Loan Keeps Growing Even Though I Do What They Offer

One more thing, you should not overwithhold in hopes of getting a big refund. Just adjust your withholdings to get more in the check each month and breakeven at with the IRS at the end of the year. No sense giving them your money for free.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

19 Comments

  1. Renee

    March 1, 2017 at 10:57 am

    Tara – there is a difference between being late a few months on your payments and default. By DOE standards, true default occurs once you have not made a payment after 270 days. Once it goes into default you have a few options to remedy the default if you choose to. I am with Steve in not defaulting. Since you have FFEL Loans I believe they only have one Income Driven Plan to choose from (Income Based Repayment at 15% Discretionary Income). If I were you, I would Consolidate (Convert) your FFEL Loans into DIRECT Loans, file your taxes separately from your husband and go for the PAYE (Pay as you Earn) (or REPAYE if PAYE is not available) which should give you the lowest payment possible (10% Discretionary Income). With the income you already gave us, it is likely that your payment would be $0 per month. There is a 20 year forgiveness built in to either of the repayment options I detailed but be careful because at this point in time the amount forgiven is taxable at the end of the period. Converting to DIRECT loans also opens up other options like the Public Service Loan Forgiveness Program if you go to work for a qualifying in employer at least 32 hours per week (typically a tax exempt non-profit or government agency [city, state, federal, tribal]) you can be forgiven after 10 years with no tax implications. Good Luck!

    • Steve Rhode

      March 1, 2017 at 12:05 pm

      Excellent advice.

      The continued broken part of this process are the programs which are household dependent rather than individual income dependent. As Tara noted, the cost of filing married but separate over time can lead to a large tax consequence.

      And thank you for typing all of that other advice. I repeat it so often my fingers don’t want to type it yet again. Keep commenting.

      • Renee

        March 1, 2017 at 12:10 pm

        Love your blog Steve! I always learn a lot.

  2. Roxann Roush

    February 28, 2017 at 4:07 pm

    Steve- I am in a similar situation as Tara with FFEL loans that are Parent PLus. I have had some health issues(cancer) and may become disabled. What will the government do to me then? I am currently not in default but have been in forbearance for the past year because of my health issues.

  3. Tara

    February 28, 2017 at 12:33 pm

    Another thought I had was bankruptcy, but I don’t have any other debt – I have student loans and a ~$2,500 credit card (it’s only in my name) … *sigh* thanks again for your assistance, Steve. I have reached out to Damon as well.

    • Steve Rhode

      February 28, 2017 at 12:54 pm

      Currently the bankruptcy route can be expensive with the cost of the Adversary Proceeding and the lack of attorneys experienced in suing lenders in bankruptcy.

  4. Tara

    February 28, 2017 at 12:21 pm

    I am confused: if I were to default, they might settle for the original $29k (approx) principal balance? Or the current balance $80k with fees/interest since defaulting excused?

    Also, the link mentioned something about paying your original standard 10 year payment structure – is that what they originally asked for when I graduated? Only it would (obviously) be extended out until the full $80k is paid off?

    I will look at Damon’s page as well to see what more I can possibly do. I was really hoping for a settlement offer – even if payment terms weren’t ideal – but looks like that’s not a thing the federal loans do … I think I misread the article that mentioned it.

    • Steve Rhode

      February 28, 2017 at 12:39 pm

      Current $80k balance. Balance at time of default.

      When repaying federal student loans the standard 10 year repayment is the least expensive and fastest way to repay when you factor in loan balance plus interest over time.

      But here is what the Department of Education currently says, “Settlements and compromises are only available to defaulted borrowers and are intended as a last resort after other repayment options have been exhausted. Specific guidance related to settlements and compromises is confidential, given that publicizing this information is not in the best interest of the government as it could enable borrowers to reduce their repayments below the amount they can legitimately afford. [January 8, 2016]”

      Federal loans rarely settle because they have no reason to. They have all sorts of enforcement options at their disposal, including administrative wage garnishments. But I have seen settlements once someone is sued by the Department of Justice http://getoutofdebt.org/53373/being-sued-for-a-federal-student-loan-dont-panic-must-read-this or as part of a bankruptcy Adversary Proceeding when the indivual has a compelling argument. See http://getoutofdebt.org/category/debt-articles/student-loan-related/student-loan-bankruptcy-discharge

  5. aggiefamily05

    February 27, 2017 at 3:40 pm

    Based on what state she is in, it might be interesting to mention separate property versus community property. Did she take out the loans before getting married? The lenders might try to put a lien on her home, but did the husband own the home before they got married? Just my two cents.

    • Tara

      February 28, 2017 at 11:58 am

      We are in NH. Loans were taken out long before we were married (loans 1992, married 1999). We just bought the house 10 years ago….

      • Steve Rhode

        February 28, 2017 at 12:52 pm

        In that case you are going to have to call the servicer listed on NSDLS and ask them specifically if your father is a cosigner. At one time, before Parent PLUS loans, you could get a cosigner for a federal student loan. If you look at the story on page 5A from 1991, “Critics say benefits bill denies college loans to those in need”, you will see a reference to the need for a cosigner. http://archive.cantonpl.org/observer/1991/12_Dec%201991/12-19-1991.pdf

  6. Erika

    February 27, 2017 at 3:24 pm

    If it’s a federal student loan the irs will intercept your tax return if in default status as well.

    • Steve Rhode

      February 28, 2017 at 10:56 am

      Erika, what always blows my mind is people getting their refunds intercepted at all. The solution is simple, just don’t get a refund and it won’t be intercepted. Argggggh

  7. Tara

    February 27, 2017 at 3:20 pm

    Question asked.

    • Steve Rhode

      February 27, 2017 at 3:21 pm

      Tara, I answered your question but have more questions. Please post your answers in the comments.

      • Tara

        February 27, 2017 at 5:21 pm

        Steve, thanks for the prompt help. My loan is listed on that website so that is a relief that my dad isn’t involved. He lived with my uncle for a few years about 10 years ago, and had gotten a letter from sallie Mae mailed there a few months ago – I thought it must have been something about him being a consigner, my uncle shredded it without opening – they may have been trying to locate me (even though they have phone numbers and my address)

        The summary line says total FFEL consolidated, and has my total balance. The detail lines have Stafford unsub and sub, and Perkins. I vividly remember getting a check from the financial aid office after they got paid – I used it for books and my monthly subway passes and others incidentals.

        I thought I had read on your site *somewhere* that navient sometimes settles after 120 (or maybe 270?) days in default. Maybe it was Damon’s site though. I am already 2.5-3 months default.

        Thanks again for your assistance, and especially your compassion.
        ~Tara

        • Steve Rhode

          February 28, 2017 at 11:07 am

          Tara, so if the loan is listed under your name and is not a Parent PLUS loan then it is highly unlikely this is one of those really old loans that did have a cosigner. In my opinion the best course of action at this point is NOT TO DEFAULT. There is almost little upside to defaulting on a federal student loan. While the loan might be able to be settled after a year or more of default, the added 20% collection penalty and building interest are unnecessary and these settlements are typically for 90% of the principal balance with no great payment terms. The only thing that gets settled away is the interest and penalties that only are created by defaulting.

          So the logical choice here is to enroll your loan into an income driven repayment plan before you ever default. You can learn more about available plans at https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven and if you want to get some expert guidance about which plan is best for your situation and tax status, contact my friend http://DamonDay.com for help.

          Income based repayment programs are not a free pass. There are some significant downsides to them but when it comes to federal loans when you can’t repay them with the standard repayment plan, they are an option. See http://getoutofdebt.org/85779/income-based-student-loan-payments-can-terrible-trap

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