Episode Transcript
Brenton: [00:00:00] hey guys. Welcome back from the holiday weekend. We have shared many times on this podcast the New Money, New Problems podcast that we have another podcast that we operate that's not connected to the business that we do as a financial advisory firm. We have to make sure for compliance reasons, those are separated.
I'm acting in my capacity as a financial advisor on this podcast, Escape Student Loan Debt is for student Loan specific questions. But occasionally the subjects that we cover on those podcasts merge. So I think for the second time, we are going to actually after this brief introduction be playing you a recording of this week's episode of the Escape Student Loan Debt podcast, where we talk about the consequences of what happens if you choose not to repay your student loans or make your payments when they start back up in October. So I hope you enjoy it. The next voice that you hear will be my voice, just on a different platform. So I'll be back in your ear in just a second.
[00:01:00]
Brenton: Hello, my name is Brenton Harrison of Escape Student Loan Debt, and your host for the Escape Student Loan Debt podcast. I hope you guys had a good Labor Day weekend. As we get a little closer to student Loan payments restarting in October, student Loan interest actually started this month, we have more and more people who are asking questions about what happens if they don't make student Loan payments.
Some of these people are looking at the payment that they're due to make in October and they're saying, this is inconvenient. I don't want to make this payment. There are others who are saying, this is debilitating. I cannot make this payment, so what happens if I just don't? And to answer that question, you kind of have to go through what happens when you don't make payments in normal times versus what will occur if you don't make payments over the course of the next 12 months. 'cause those are two different answers. So before the break, we're gonna talk about what happens when you don't make payments in normal times. And then after the [00:02:00] break we'll talk about what happens over the course of the next 12 months.
So typically what occurs when you don't make a student Loan payment, a federal student Loan payment, is you have to deal with these two different levels in terms of their importance or their weight.
And those levels are delinquency and then at the top level, default. And there's a difference between what it means to be delinquent or in default with your student Loan servicer and what it means to be in delinquency or default with a credit bureau. 'cause those are two different things. Sometimes they work hand in hand.
Sometimes they're completely different, so we want to cover what that means. To be delinquent means that you have simply in the eyes of your Loan servicer, been a day late or more on your student Loan payment. If you're following along with us on screen we're reading straight from the student aid website, it says 'the first day, and the first day is in bold print ,after you miss a student Loan payment, your Loan becomes past due or delinquent. Your Loan remains delinquent until you repay the past due amount or make other arrangements such as deferment or forbearance. [00:03:00] As soon as you pay, that status is removed and you are in good standing with your Loan servicer. It also says on this page that if you're delinquent on your student Loan payment for 90 days or more, your Loan servicer will report the delinquency to the three major national credit bureaus.
Here's the first instance of us seeing the difference between what it means to be delinquent with your credit bureau and delinquent with your student Loan servicer. What they're describing is essentially a grace period. And many forms of Debt. Have it. You can miss a credit card payment, but they may not report it until it's been 30 or 60 days.
You can miss a mortgage payment. It might be a shorter period, but there's a period in time where your lender considers you late or in delinquency or default, but they may not yet have reported it to a credit bureau. With student loans they're saying that that grace period is 90 days. After 90 days if you have not paid them what has been owed, then they will send a formal declaration that you are delinquent to Experian, Equifax, and TransUnion.
Now [00:04:00] delinquency status is a big deal. It is literally like kind of a stamp when it comes to that particular Debt. And especially when it comes to federal Debt we've talked about the report called the CAIVRS Report, C A I V R S, and this is essentially a database that keeps up with how you're dealing with repaying federal Debt that you've taken out.
And if you have a delinquent status on your CAIVRS report, it can prevent you from getting other federal forms of financing. So that's a big deal.
But that is delinquency status. Now that second layer is default. That's the second level.
Delinquency is after 90 days, default is after 270 days, and this is terrible. When you have a federal student Loan in default, one of the first things is you are now forbidden from getting new student loans from the federal government. So even if you're in school or trying to go back to school, you cannot sign up for another student Loan while you have your current default status on your student loans.
That's like the smallest consequence of default, and they list them here. The consequences of default, again, if you're following along with us on [00:05:00] screen, once you're in default status, instead of that late payment being due, the entire unpaid balance of your student Loan becomes immediately due. This concept is called acceleration.
So before this period of time, maybe you miss three payments that were a hundred dollars. It's going to show that you're $300 behind in your payments. Once you reach default status, if you have a hundred thousand dollars in student loans, they're saying you immediately owe the entire a hundred thousand dollars.
You can't go into deferment or forbearance on your student loans if you have a default status, so you can no longer use those options to pause payments. That default is reported to your credit bureau, which terrorizes your credit, and it can have a very long impact.
And here's some of the other major things that many people don't realize, especially depending on the state in which you live. When you have defaulted student loans, this is sent to a collection agency, and that collection agency can look at what you owe and some of the avenues that they have to receive payment as they can garnish your wages.
So they can take money out of your paycheck and you have no [00:06:00] say in the matter. They can garnish your tax refund and they can garnish it until they have been repaid in full. So it's not like, oh, that $300, they garnish it until they get that back. Remember, the whole balance is immediately due. So they can garnish your wages until they have been repaid the a hundred thousand dollars plus interest, including your tax refund.
So all these things can occur, and in certain states, they even go a step further and they will actually suspend or revoke your professional license while you have defaulted student loans.
So if you're a teacher or a nurse or something that requires a state-based license in order to practice, they can revoke it while you are in default status.
So suffice to say in normal times, you would want to avoid either of these statuses and if you could find a way to make a student Loan payment, you should do it. And even if you can't, you should consider forbearance or deferment, which puts a pause on payments rather than just missing it altogether and dealing with the repercussions of what it does to your credit.
After the break we'll talk to you about what will happen over the next 12 [00:07:00] months and how it differs. And this is something that you definitely don't wanna miss out on. So I'll see you in a second.
[00:08:00]
Brenton: All right, so what happens over the course of the next 12 months if you decide not to make a student Loan payment. I will tell you that I'm not even sure that the Department of Education really knows what the consequences will be, but they have described and established what's called an on-ramp transition period for people who are trying to return to payment but are unable to do so.
And what this on-ramp transition period is as described is essentially 12 months where they're going to try, at least from the Department of Education side, to blunt the impact of not making an on-time payment for your student loans or not making a full payment. Or not making a payment at all.
If you're following along with us on screen, and if you're not, we'll put this in the show notes, there's actually a description of the on-ramp transition period on student aid.gov, and it says, and I quote, to help borrowers successfully return to Repayment we created a temporary on-ramp period through September 30th, 2024.
If you decide to take advantage of this, I highly suggest that you put this date on your calendar. This on-ramp period protects borrowers from [00:09:00] having delinquency reported to credit reporting agencies. This prevents the worst consequences of missed late or partial payments.
However, payments are still due and interest will continue to accrue. We will not report you as delinquent during the on-ramp period, but we do not control how credit scoring companies factor in missed or delayed payments. Only loans eligible for the payment pause are eligible for on-ramp. So those loans eligible for the payment pause again, are direct loans or FFEL loans that were owned and managed by the federal government.
And if you're looking at the reading of this, they're essentially saying, we are going to, on our side, not submit a delinquent status to your credit bureau. Remember, 90 days is the grace period. After 90 days they send to the credit bureaus that you are delinquent. But they're also giving themselves some wiggle room to say that they don't control how credit scoring companies are going to factor in the fact that if that period of time lapses and a payment hasn't been reported, that the credit bureau themselves could mark you as late.
And it says, and I quote, Normally if you miss payments, your [00:10:00] Loan is considered delinquent and is reported as such. But during the on-ramp period, your Loan servicer will automatically apply a forbearance to your student Loan account for the payments you missed. These retroactive forbearances will be applied through September 30th, 2024.
Here's what this means. Your account will no longer be considered delinquent and will be made current. Your recent missed payments will not lead to negative credit reporting, and your loans will not be sent to collection agencies. Again, they're kind of speaking out of both sides of their mouth, but they're trying to give themselves some wiggle room, in my opinion, to avoid a lawsuit.
They're essentially saying that what will happen is if you miss a payment, at the end of the month, they're gonna go back and they're going to retroactively apply a status of forbearance to that missed payment, which would mean it's technically not late. And they're gonna do that every single month on a rolling basis through September 30th, 2024.
So their thought process is that by us doing this, by us retroactively applying forbearance, not only would you not be considered delinquent in terms of your credit bureau, but you hopefully would not be considered having made a [00:11:00] late payment. But they can't guarantee that, which is why they said they can't control that factor in terms of credit bureaus. Now they're making very clear that your payments are still due and interest will continue to accrue. So this is not like during the payment pause where you didn't have to make a payment and you didn't have to worry about interest growing on your loans. If you take advantage of this, you will see interest growing and continuing to build up on your student loans. And if you have a certain payment plan that could affect your future payment as well.
Those payment plans will be things like the graduated extended plan or the standard plan. Any payment plan that you're on where you actually have to pay that Loan off in full. 'cause if that interest is growing, it is changing the amount that you owe, which changes the amount that you need to pay every single month to pay it off in a given time period.
So they say, as interest builds up, your servicer may also be required to increase your monthly payment to ensure you pay off your loans in time. If so, your servicer will send you a notice of the changed monthly payment amount, and it says, [00:12:00] parenthetically, note, on an Income Driven Repayment plan, your monthly payment will not go up if you build more interest.
The reason this is an important distinction, you should know this by now, Income Driven Repayment plans are not based on what you owe. They're based on a percentage of your Discretionary Income. And because of that, even if the amount that you owe goes up, if your income hasn't changed, Neither does your student Loan payment.
So for the next 12 months, they're basically saying, we're gonna do the best we can to make sure that nothing is reported to the credit bureaus if you cannot make payments. And to me, this is something that's come up a lot recently because even with high income earners, like the ones with which we work, they're coming into situations where it's like, look, I have another child since the pandemic started, or I have another child that's in school, or I have more Debt than I had before the pandemic in terms of what I pay on a monthly basis.
Whatever the case may be, it's a payment that I just simply can't make right now. What would happen if I don't. And I would tell you if you're on an Income Driven Repayment plan, the consequences of it [00:13:00] are a bit muted as long as the Department of Education's plan to report or not report, I should say, to credit bureaus, actually comes to fruition.
But it's something that if you're trying to take that route, you would want to on an every single month basis be looking at your credit report to make sure that no payment was issued as late. So that's what it does in terms of your status with the credit bureau. What does it do in terms of your status with the Loan itself?
Well, we just mentioned what it does to the standard plans, to the extended graduated plans and what have you. For the Income Driven Repayment plans. Remember, after 20 or 25 years of payments, any remaining balances on these loans are forgiven. And at least until the end of 2025, if you have your student loans forgiven under these plans, there is no taxable consequence to that forgiveness as well.
After 2025, however, if those rules are not extended, then it'll go back to what it was prior to them being established. Which was under Income Driven Repayment plans, any amount that was forgiven is taxable as [00:14:00] income in the year of forgiveness. As an example, if you have $200,000 worth of loans forgiven in year 2027, And they haven't extended that rule, that year, you'll pay taxes on whatever you earned, plus an additional $200,000 worth of income. So keep in mind there could be a consequence to having that interest build up, over the course of the next year if you decide not to make payments, if that rule is not extended. However, if it is extended and this is not a recommendation for you to do this, then there's a possibility that if they don't charge taxable income on those forgiven loans, that that extra year of added interest doesn't really make a difference. Because you're having it forgiven anyways and you're not having to deal with the taxable consequences of that forgiveness.
Again, not a recommendation to do it, I'm just telling you the potential pros and cons of the decision that you can make. There are also people who are asking me questions when it comes to this strategy about interest subsidies. And as a refresher, an interest subsidy is when the Department of Education covers some of the growing interest on your loans for you.
You've probably seen a [00:15:00] lot of stuff in the news if you've been keeping up about student loans, about the SAVE plan, which is an Income Driven Repayment plan that subsidizes a hundred percent of the unpaid interest on your student loans. So if you're making payments, but it still leads to an extra $10,000 of interest, the Department of Education on this plan is covering it in full.
Unfortunately, they are not covering that interest. If you haven't made a payment, the way that that statute reads is they will cover a hundred percent of the unpaid interest as long as you are making the agreed upon payment on your plan. So if you had a $200 monthly plan, And you made that payment and there was still interest , they would cover it.
But in this scenario, if you don't pay it at all, they're not going to cover the interest because you didn't hold up your end of the bargain. So it's not something where you're getting a free meal out of it and there's no interest that's accruing and you don't have to make the payments. There is going to be a consequence to this.
It's just a matter of if you think that consequence is worth doing in terms of what your finances look like. Now, I would say that if you think there's a substantial [00:16:00] likelihood that you're unable to make these payments for the entire year, It would likely benefit you for the peace of mind aspect to just file for a formal forbearance or deferment.
If you already know you're not making the payments through that period, why not just say, Hey, I can't make the payments and formally apply. But if this is something where you're sitting there saying, I'm trying to do the best I can, but there's a possibility that during a month or two of this period that I wouldn't be able to make the payments, then this is something that is hoping to make sure that you're not punished in terms of your status with the credit bureau or the Department of education as a result of that lapse.
So I hope that this was helpful to you. As we get closer to October 1st, we may be releasing some episodes, uh, more frequently than our every other week schedule, so whether it's in two weeks or next week, I will see you on the next episode of the Escape Student Loan Debt podcast. Talk to you then. [00:17:00]
