Finance Fridays Bonus: Student Loan Rehabilitation

finance fridays piggy bank I just got two envelopes in the mail from the US Department of Education (USDE).

You see, during the “lean times” around here, both Randy and I managed to default the S**T out of our federally funded student loans. There’s default and then there’s default, and we seriously were behind. At one point his wages were getting garnished. (Of course that was when he was working at Starbucks for health insurance so they garnished the whole $3 that his check was.) But that’s not the point, it was serious.

Then in the process of cleaning up all this mess of debt that we spilled everywhere, we started paying back student loans. But there were two pretty big problems:

  1. We were paying the money back to bill collectors, not the USDE. We were afraid this might be a scam or something.
  2. The fees listed on his loan are $7,803.68 and the fees on my loan are $4,349.07 – while the companies swore to us those wouldn’t be charged as long as we paid them for nine months in a row, it didn’t make a whole lot of sense and we were scared.

Finally, after asking many people many times, we were informed of the status of our loans. Even better, someone finally explained what the Student Loan Rehabilitation Act was and how it worked.

After you pay an amount on your bill for nine months they transfer it back to the USDE at the loan amount without fees and penalties at the original interest rate you signed the loan for. Basically, you get a do-over. They also stop taking your federal tax return (and stimulus checks) and they don’t garnish your wages. All very, very good things for us.

So the student loan debt we had, which totaled $62,082.28 as of the writing of this post, will go down (after rehab is complete) to $45,078.30 – Which is a SEVENTEEN THOUSAND DOLLAR DIFFERENCE.

That is a lot of money. Sure almost 50k in student loans is a lot of debt to be in, but man, when you look at over 60k and then look at 45k…suddenly 45k doesn’t look so scary anymore. Talk about putting it in perspective.

Speaking of payments…when I first called up and asked the bill collectors about making payments, they were really nice, but stood firm that I needed to be making payments of $400/month and at the very least $300/mo to start satisfying this debt. I told them we didn’t have that kind of money and it would be absolutely impossible to pay that much without becoming homeless, and if we were homeless we couldn’t pay them anyway. It took about a half hour, but I talked them down to $185/mo. I kept saying I could only pay $100/mo. and they kept going down and I held firm until they stopped dead in their tracks at $185/mo. and told me they could not go down anymore. It is possible I could have pushed farther, but the real number I had in my head was $200/mo. as what I could afford. But I knew if I started where I really could afford to pay, they’d bump me up from there, so I started really low.

With Randy’s loan, it’s twice as much as mine, so I figured we’d be great if he could get a payment under $300/mo. So he said he could pay $150/mo. on his loan and stood firm until the company told him the absolute bare minimum they could do was $280/mo. He took it and we set up auto-debits through our checking account.

I know that Dave Ramsey says to never, ever give a bill collector access to the checking account, but we hadn’t heard that when we set this stuff up.

Both companies (Randy and my loans are through different Rehab programs) told us that when the payment goes back to the USDE that two things will happen:

  1. The payment will drop. In many cases it drops to half of what you paid to rehab, because about half of your nine months’ worth of rehab payments are going to the collection agency for fees, etc.
  2. The USDE does not do auto debit. They told us that if, after nine months, we had not received word from the USDE we were to contact the bill collector immediately so they could call the USDE and make sure the processing was complete and for the address to send our student loan payments to monthly.

So we know that in another few months we won’t have that automatic debit from our checking account anymore. Plus the monthly payment goes down, allowing us to more effectively work the Debt Snowball and get debt free faster than our current estimated date of June, 2020. I have to redo that date based on the $17k drop in student loan debt once they’re rehabbed, but I’m not going to do that until it really happens so if there’s a problem I’m not horribly disappointed. That 2020 date also includes having money set aside for the kids to start a business or go to college depending on their desire. That number puts me at 45.

That number is also assuming I never make more money than I do right now and that Randy never gets a raise or another freelance client, but I like to err on the side of worst-case scenario.

I need a fun button for my sidebar that says “I plan to be debt free by 2020!” Then I can just change the button/banner when salaries, billing, or other things change.

Hope there was some helpful information in there for those of you who may be worrying about currently defaulted student loans or school loans you know you might go into default but you don’t want to deal with. The key is to not get emotional when they threaten or insinuate they can do bad things to you if you don’t pay. If you just keep saying, “I know I owe this, I want to repay it, but I can only afford ____ right now. What can we do?” It puts it back on them.

Good luck!

Image Source: woodsy

September 5, 2008 | By: Jennifer Gniadecki | Filed Under Current Events, Finance Fridays, Money |  

Comments

3 Responses to “Finance Fridays Bonus: Student Loan Rehabilitation”

  1. Cindi on September 5th, 2008 9:13 pm

    This is great information! I defaulted on one student loan about 10 years ago. They were going to garnish my wages. I did the nine month thing and wound up paying it off in full before the due date. The loan was small, maybe $1,500.

    Now my husband and I both have huge loans coming due. We have deferred twice. We have one more deferment left because they only let you do it three times and then the crying begins. I don’t look forward to it because the way things stand now, we can’t pay them. I have a year to figure it out though. Time will tell.

    It is just nice to know that we are not alone in the black hole :)
    Cindis last blog post..Being OK With Me

  2. Eric on September 6th, 2008 8:10 am

    Wow. Great advice. Reminds me that I need to stop ignoring the calls about my student loans. :)
    Erics last blog post..Review: Alberta Cross - The Thief & The Heartbreaker

  3. Jennifer Gniadecki on September 6th, 2008 8:22 am

    You can only rehab once, so if you’re going to talk to them make sure you’re ready for a long-term commitment!

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