How to avoid default and reduce student loan payments
Could Student Loan Debt Derail Your Retirement?
by Christine D. Arkovich, esq.
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Older Americans are facing a debt crisis that many don't even know is upon us. I'm talking student loans. It's not just a problem for millennials. Millions of parents and grandparents have co-signed for their children's private student loans, and in many instances, they have taken out Parent Plus loans for children attending college.
As of late 2015, nearly two-thirds of borrowers with Parent Plus debt were between the ages of 50 and 64, according to the Governmental Accountability Office. More than three million Americans have taken out Parent Plus loans which were given to parents without consideration about the borrowers' income, ability to repay, existing debts, savings, or credit scores. Since September 2015, about 11% of these borrowers have gone at least a year without making a payment on a Parent Plus loan, which exceeds the default rate of homeowners during the housing crisis. This doesn't even include defaults on private loans where parents or grandparents have co-signed for their children or grandchildren. As time inevitably marches on, more of these Parent Plus borrowers will default as they begin to retire. A whopping 37% of federal student loan borrowers age 65 and older were in default, according to a recent Consumer Financial Protection Bureau (CFPB) report.
During the housing crisis, subprime mortgages peaked at 20% of all mortgage originations in 2006. By comparison, nearly 40% of federal student loans went to borrowers with credit scores of less than 620, which is the threshold for a subprime borrower. This figure even excludes those with shallow credit histories, such as new graduates without much credit to their name. The Parent Plus program checks only the borrower's past five years of credit history for major items like bankruptcy or foreclosure and the past two years for delinquency on debts of more than $2,085. The ability to repay, particularly for a lengthy term of 10-25 years, was not even a consideration. Many parents likely were expecting their children to repay the loans, but the poor job market has intervened. Many older Americans feel that they cannot afford to retire due to their student loan payments, thus linking the education crisis to a retirement crisis.
Yet, most people are unaware of this looming debt crisis for older Americans despite the fact the numbers are trending to be much worse than the subprime mortgage default rate during our housing crisis. The Consumer Financial Protection Bureau Director, Richard Cordray, states: "It is alarming that older Americans [age 60+] are the fastest growing segment of student loan borrowers and student loans are contributing to financial insecurity for many older Americans."
Default on Parent Plus federal loans has several penalties. First, the balance is likely to go up by 25% for collection costs. Second, the borrower's credit, which was already negatively impacted with high student loan balances affecting loan-to-debt ratios, now worsens due to late payments or even default. This will serve to increase the costs of other financing, such as retirement homes, credit cards, vehicle loans and insurance, medical or dental insurance, etc. Perhaps most importantly, the rates of Social Security offsets or garnishments have increased by nearly 500% from 2002 to 2015 for Parent Plus loans. Tax refund intercepts and wage garnishment can also occur.
Fortunately, there are actions that can be taken by borrowers to minimize the danger of default and reduce student loan payments. First and foremost, borrowers should recognize that the servicers of Parent Plus loans represent the Department of Education (the creditor) and not the borrowers. It is important to learn all you can about the student loan system through government sites like StudentLoans.gov or retain the services of a student loan attorney to advocate your interests. Most people aren't even aware there is such a thing as a student loan attorney and are surprised about the reasonableness of the fees to get the answers and help they need.
Find out if you can benefit from student loan debt help.
Second, there are income based plans with debt forgiveness that are available for federal loans, including Parent Plus loans. Sometimes an older FFEL loan will need to be consolidated to a newer Direct loan to take advantage of these programs. Occasionally we will recommend our clients file a married filing separate tax return to exclude their spouse's income. We have helped many people with monthly student loan payments of over $1,000 into income based plans of zero without affecting their credit. And these clients were previously informed by their servicer that nothing could be done to reduce their payments.
According to a CFPB report, without this knowledge or an advocate on their side, older borrowers are reporting that they are struggling to make their student loan payments, and in some cases, they are skipping necessary health care needs such as prescription medicines, doctors' visits, and dental care because they could not afford it. Many are afraid of answering the phones due to the collection calls and abuse.
Please share this article with your friends and family to help spread the word that there are ways to counteract this crisis and to take control of student loans no matter what your age.
Christie D. Arkovich is a Tampa, Florida attorney who specializes in helping student loan clients in reducing or eliminating their student loan debt. She is a 25 year veteran who used to represent Sallie Mae and other servicers/guarantors before switching sides to represent only consumers. Visit her at ChristieArkovich.com.
Take the Next Step:
- Does it seem like your finances keep getting more and more complicated? It seems that way because it's true. And that means that you need to keep things organized. Not only for yourself, but ultimately for your children. Our pre-retirement checklist will walk you through the steps you need to take.
- Use this tool to maximize your retirement by determining the best age to take your Social Security benefits. Don't leave thousands on the table by taking Social Security at the wrong time.
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