NORFOLK, Va. — Student loan debt is of the top three debts that people in the United States carry, according to LendingTree.
Sarah Smith understands that reality.
"I worked two jobs and school, full time, kids full time. Their dad was deployed last year, so I had zero help last year. Yeah, it was really, it was really tough, but when you're determined, you push through," Smith said.
The Hampton Mom went back to school to become a counselor and make more money.
As she waits to receive her master’s degree and graduate in July, she is anticipating her student loans.
"When you hear 100K, like, that's a big swallow, that's a lot of money," she said.
Watch related: Avoiding student loan debt: tips for an affordable college experience
She joins millions of others in similar situations, each facing unique challenges.
"There’s a misconception that borrowers don't want to pay, and they do, but they need those payments to be affordable," said Scott Kemp, a student loan advocate for the State Council of Higher Education for Virginia (SCHEV).
Kemp works with many borrowers, including those who have applied for repayment programs but are stuck in processing, those who were in default before the pandemic, and those newly in default.
According to the Education Department currently, more than five million borrowers are delinquent, with an additional four million potentially facing the same fate in the coming months.
Watch related: Trump admin resumes full student loan debt collection
"It probably won't hit home until they get the letters [from the Department of Education]," Kemp said.
The forced collections on federal student loans in default resume after a five-year reprieve during the pandemic.
"Unless [borrowers] do something, they're going to go back into collections and they're going to go back to Treasury Offset Program, which can include taking tax refunds, garnishing their wages, garnishing Social Security," Kemp warned.
What options do you have?
The Department of Education outlines three options: repayment, rehabilitation, or consolidation.
- Repayment is an option if you want to get out of debt entirely. You can pick from repayment plans that base your monthly payment on your income or that give you a fixed monthly payment over a set repayment period
- Rehabilitation can help your credit. You can get out of default by making a certain number of consecutive, on-time payments to your loan holder under a rehabilitation agreement
- Consolidation is an option that helps you get out of debt more quickly. A Direct Consolidation Loan allows you to combine one or more federal education loans into a new Direct Consolidation
But first, ensure your loan servicer has your current information.
Watch related: New requirements to pay back defaulted student loans
"I don't think any single borrower has the same loan servicer they had prior to the pandemic," Kemp noted.
You can find information about your loan servicers at studentaid.gov, which also offers a loan simulator tool. The interactive tool allows you to see all the different loan repayment plans available and how that would affect monthly payment, interest, and repayment length.
As you navigate this process, Kemp advises to document everything.
“Document everything that they do, including if they submit something, take a screenshot of it, because if there are issues down the line, makes it a lot easier for us to work through issues,” he said.
While Smith's situation is unique, and she’s not in default, she finds that the national discussion about debt is informing her options and helping guide her decisions.
"If you just think about it as paying it off quicker and so then you have less interest rate. That's probably the best thing I would do," Smith said.
Smith said she is familiar with setting up a payment plan that aligns with her lifestyle after having worked with Money Management International in the past. MMI, a nonprofit credit counseling agency, helped her pay down more than $22,000 in credit card debt.
Watch related: Millions of student loan borrowers could soon see a drop in credit score
MMI also offers debt management plans and repayment options for student loans.
What’s the difference between default and forbearance?
- With forbearance, you won’t have to make a payment, or you can temporarily make a smaller payment. However, you probably won’t be making any progress toward forgiveness or paying back your loan. As an alternative, consider income-driven repayment.
- If you are delinquent on your student loan payment for 90 days or more, your loan servicer will report the delinquency to the national credit bureaus, which can negatively impact your credit rating. If you continue to be delinquent, you risk your loan going into default. You will be in default if you do not pay for 270 days or more.
How does being in default impact your credit?
The Department of Education says, if you have a poor credit rating, it can be difficult for you to get credit cards, home or car loans, or other forms of consumer credit. You may also be charged a higher interest rate than someone with a good credit rating.
You also may have trouble signing up for utilities, getting homeowner's insurance, getting a cell phone plan, or getting approval to rent an apartment.
According to the Department of Education,
“FSA is committed to keeping borrowers updated with clear information about their payment options to put them on a productive path toward repaying their federal student loans. Over the next two months, FSA will conduct a robust communications campaign to engage all borrowers on the importance of repayment. FSA will conduct outreach to borrowers through emails and social media reminding them of their obligations and providing resources and support to assist them in selecting the best repayment plan, like the new Loan Simulator, AI Assistant (Aiden), and extended servicers call times. FSA will also launch an enhanced Income-Driven Repayment (IDR) process, simplifying the time that it will take borrowers to enroll in IDR plans and eliminating the need for borrowers to recertify their income every year. More information will be posted on StudentAid.gov next week. “
