Helping people understand student loans is our job at SALT™, and few are better at it than Betsy Mayotte—the director of regulatory compliance for American Student Assistance®(our parent company). We told borrowers to “Just Ask” her questions, so check out her answers below (as well as her cat—because if Piglet can’t make student loans better, what can?).
The Consequences Of Default
My mom is a flight attendant making under $30,000 a year. Her husband is retired. She took out a Parent PLUS loan years ago for around $40,000. That has now ballooned to $100,000 due to forbearance after forbearance and default. There are many reason she let it go this long, but at this point, it really doesn’t matter. I need to know what her worst-case scenario is —not the generic stuff, but some hard numbers.
She collects Social Security every month, and from what I read, they will take 15% maximum? Is that correct? How much of her salary can they garnish on top of that percentage? How will this play out?
I’m so glad you reached out. First of all, I think you should work with your mom to get this loan out of default through either rehabilitation or consolidation. You can read about these options here.
The reason I suggest this is that getting the loan out of default will not only get rid of the risk of Social Security, wage, and tax refund garnishment, but it will also allow her to be eligible for income-contingent repayment. This plan can keep her payments manageable and allow the remainder to be forgiven if there is still a balance after 25 years (10 if she works for a nonprofit or the state or federal government). Parent PLUS loans aren’t technically eligible for income-contingent repayment, but if they are consolidated into the Direct Loan program, they gain that eligibility. Unfortunately, they are never eligible for income-based repayment.
If you think that’s not a good solution for her, that’s OK too. To answer your question, yes—they’d garnish up to 15% of her Social Security (unless it was SSI; that cannot be garnished) that is over $9,000 per year and 15% of her wages, as well as taking her state and federal refund. There’s also a chance they sue her, and this tends to happen more with six-figure balance loans. This is why I think she’s better off getting the loan out of default and pursuing income-contingent repayment.
Take a look at those options then email me again and we’ll work out the best strategy for her.
Refinancing Student Loans
I currently have my loan consolidated with an interest rate of 6.5%. I have a fairly good credit score (between 700 and 750). Is it possible to or wise to transfer my loan to someone else to get a lower interest rate?
Is this a federal student loan? Interest rates for these loans are set in federal law by Congress and cannot be refinanced within the federal program. They also are based on a weighted average of your underlying loans rounded up to the nearest 1/8%, not on your credit score (but congratulations for having a good score, by the way!).
Some companies outside the federal program are willing to consolidate federal loans, and they may offer you a lower rate—but I would not recommend taking that action. Federal student loans offer lower payment options and protections that private loans do not. These include postponements, income-focused repayment plans, loan forgiveness, and discharge options. You will want to preserve these options in case life throws you any curveballs along the way.
You can save additional money in interest by paying extra when you can. There is a never a pre-payment penalty on student loans, and the faster you pay your debt off, the less you pay in interest.
Please let me know if you have additional questions
Have a student loan question you need an answer to? Just Ask.
(Note: The questions and answers above are real; however, they have been edited for grammar and clarity, but not by Piglet.)