Angela Colley — Ask an Insider
It isn’t always easy to pay the bills. Whether you’re a new college graduate trying to find a job that will at least keep a roof over your head, or you’re raising two children and can’t remember the last time you got a raise, the cost of living is, well, costly, and sometimes we have to make difficult decisions just to get by. Case in point: nearly 5 million Americans have defaulted on their student loans. Once in default, the entire loan balance can become due immediately thanks to the black magic of acceleration, leaving many people in even worse shape financially.
It’s something Taunya Kennedy understands. Kennedy works fulltime for the nonprofit credit-counseling agency Money Management International, fielding back-to-back calls from borrowers in over their heads. As a single mother, she’s also working through her own student loan repayment plan after years of delaying payments while she raised her now-teenage son.
Kennedy knows that anyone can fall a little—or a lot—behind. Her organization schedules between 50 and 70 new clients per month whose primary concern is their student loans. Recently, we caught up with her to talk about repayment programs, debt consolidation efforts, and what really happens when you fall too far behind.
Has tackling your own student loan struggles helped you manage related calls from clients?
I think it has allowed me to be more empathetic to the plight of many student loan borrowers. I always want to come across non-judgmental when discussing my client’s financial concerns. By being able to relate to their situation, I think it makes it a lot easier for them to talk openly and receive my feedback.
Do you think people know all the options for help or repayment available to them?
Many borrowers have a general idea of what their options are but would like a better understanding. Many are also looking for guidance on which option might be the best solution for them.
How many missed payments does it take to default?
Basically, if you’re 270 days passed due, you’re in default.
What does that mean in terms of your credit score?
Lenders can report the unpaid balance to the credit bureaus. Late payments remain on a credit report for seven years and can significantly lower a credit score. A default or unpaid balance remains for seven years as well. This could make it difficult for an individual to qualify for future credit as well as obtain reasonable rates for services like utilities, cable, internet, or anything really.
Once loans are in default, what can borrowers do to get back on track?
Borrowers can reach out to their loan holders to discuss the options they have to get out of default. The most common options include rehabilitation and consolidation. A rehabilitation is a payment program, requiring nine payments over 10 months to get out of default.
A consolidation pays off the original loans and issues a new loan with one payment; removing the default. There are advantages and disadvantages to every option, so it’s best to review carefully before deciding.
Does consolidation actually help, or does it just delay the inevitable?
Federal loan consolidation combines multiple loans into one, simplifying repayment, opening up additional repayment plans, and providing a path out of delinquency. A consolidation could also extend the payment term, resulting in a more affordable payment. However, extending the term could make the loan more expensive.
What about refinancing? Does it work if you’re falling behind—or at risk of falling behind?
Yes, it could be helpful in some situations. Refinancing with a private loan company could result in a lower interest rate. However, refinancing a federal loan with a private lender would result in a loss of federal loan features and benefits like subsidized loans, loan forgiveness programs, income-driven repayment, and forbearances or deferments.
I’ve heard that when people at risk of default call their loan servicers, its commonly recommended that they opt for forbearance. Do you think delaying your payments is ultimately helpful?
A forbearance is a temporary suspension of payments due to financial hardship or illness. When a borrower can’t afford to make their monthly payment, this could be a good option, but borrowers should be educated on the other options like income-driven repayment, which could lower monthly payments in proportion to their income. This might be a better solution for some.
Borrowers should also always consider the potential drawbacks to any option, for example, accruing interest during periods of forbearance and the possibility of balances increasing when monthly payments aren’t enough to cover the accruing interest on a loan.
What do you think are some of the biggest mistakes borrowers make when they’ve fallen behind (or just struggle to keep up) and want to get their student loan debt under control?
One of the biggest mistakes is waiting too long to get help. When a federal student loan defaults, the borrower is at risk of having their wages garnished or tax returns withheld to pay back the loan. Sometimes borrowers are so pre-occupied with other financial concerns that they lose track of time and the longer they wait, the less options become available.
What can debt counseling help with regarding student loans?
Since student loans can be a confusing and overwhelming topic for many, counseling could help borrowers get a better understanding of their options through an unbiased party. We take a holistic approach to their finances by analyzing their other financial obligations and overall goals to help them decide on an option that best suits their situation. The time spent discussing their situation and options can help ease anxiety about the debt and give them a plan to help them achieve their overall financial goals…
Borrower’s should do their due diligence in researching the agency they are seeking help from. Some charge excessive fees and don’t really have the customer’s best interest at heart. Working with a nonprofit certified consumer credit counseling agency is a safer and low-cost option. Fees are nominal and sometimes grant funding covers the cost of the service, costing the client nothing.