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How can borrowers recover from student loan default?

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Student loan default can have serious consequences. You may be able to avoid default by choosing the right payment plan or refinancing to reduce monthly payments. (iStock)

If you don’t make your loan payments every month, you could fall into student loan default. Defaulting on student loans affects many aspects of your financial and professional life. But there are steps you can take to avoid it including changing your payment plan, talking to your loan servicer about forbearance, or refinancing private student loans (it likely doesn’t make sense to refinance federal student loans amid current benefit extensions).

Before you’re in need of credit repair, consider other options with your student loan servicer. Credible can help you explore options for refinancing student loans and reducing your monthly payments. Visit Credible today to compare student loan refinancing rates and see how your payment could be affected by refinancing.

What is student loan default?

Student loan default occurs when you miss too many payments. Considering the significant student loan debt many Americans currently carry, this can become a common occurrence.

Specifically, if you don’t make a loan payment for 270 days on your Direct Loans or Federal Family Education Loans (FFEL loans), you’ll be considered in default. With private student loans, the specific number of payments you’re able to miss before entering student loan default varies by lender. It could be as few as three payments.

What are the consequences if I default on federal student loan payments?

If you default on federal student loan payments, there are serious repercussions.

Federal student loans default affects a broad array of items. You could become ineligible to receive federal loans in the future, and the full balance on your current debt will become due immediately. You won’t be able to switch repayment programs or put loans into forbearance or deferment. Your credit score will be damaged; the government could seize tax refunds or federal benefit payments, and your wages could be garnished. You could also be sent to collections, and your school could withhold your academic transcripts.

It’s also possible that your professional license (if you have one) could be suspended.

What are the consequences if I default on private student loan payments?

When you fall into student loan default on private student loans, there are also serious repercussions.

Your credit could be damaged by reports of default and your lender will likely send you to collections. Your entire loan balance can become due, and you could face legal action to collect that may lead to a court order to garnish wages.

How do I recover from student loan default?

When you default on federal student loans, options include:

  • Student loan rehabilitation: This involves making nine payments over 10 months under an agreement with your loan servicer. Monthly payments equal 15% of annual discretionary income, which is based on the poverty level. After you’ve made your payments, you’ll no longer be in default, and the record of default is removed from your credit report — although the late payments remain on your record.
  • Student loan consolidation: You can apply for a Direct Consolidation Loan and must either make three on-time payments or apply for an income-driven plan before officially consolidating. Once your loan is consolidated, you’ll no longer be considered in default and will be eligible for all federal loan benefits again. The default remains on your record.

If you have private student loans, you’ll need to ask about options with your lender. It’s best to avoid this in the first place, as there’s not a standard path out of default as there is with federal loans. Refinancing student loans before missing a payment could help you avoid default. If you’re looking to potentially lower your private student loan payments, refinancing them could be the way to go. Visit Credible to compare student loan refinancing rates and terms and explore options.

How to avoid student loan default

Paying for college while also building your credit isn’t always easy. Your options for avoiding student loan default vary depending on whether you have private loans or federal loans.

If you have federal loans, you may be able to qualify for deferment or forbearance to pause payments. Deferment can be a better option if you’re eligible since you won’t owe interest on deferred subsidized loans. You can also choose a different repayment plan, including an income-driven plan that caps payments at a percentage of income.

If you have private student loans, forbearance may still be an option to temporarily stop payments. But forbearance policies among private lenders generally aren’t as generous as for federal loans.

Before you’re stuck getting out of default for multiple defaulted loans, do some research. You could potentially avoid default if you refinance student loans. Many financial experts recommend refinancing and with good reason. It can often reduce your monthly payments considerably, making them more affordable. There is an important caveat, however: given that student loan payment and interest deferment on federal student loans runs through September 30, 2021, now is not a good time to refi federal student loans (borrowers will lose some benefits and protections like public service loan forgiveness). It is, however, a great time to refinance private student loans.

You can use an online tool like Credible to view a rate table that compares rates from multiple lenders at once to see how your loan terms could change by refinancing. You can also use Credible’s online student loan refinancing calculator to see what your new monthly payments would be after refinancing.

By shopping around for the best student loan refinance rates with Credible before you default, hopefully, you can find a new loan with payments that fit your budget.

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If you need a co-signer, you’re not ready | Business

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My fiancée and I want to make an offer on a house. She has a lot of late payments and a bad credit record, though, but she is working hard to manage her money better and get out of debt. I don’t make enough money to get a home loan by myself, and I have some debt to pay off, too. In order to help us out, my aunt and uncle said they are willing to co-sign a mortgage loan for us. What do you think of that idea?

Here’s a simple, solid piece of advice for anyone looking to make a purchase of any kind. If you need a co-signer, you’re not ready to make that purchase—period. I’m not trying to beat you up or anything, but it’s way too soon for you two to be thinking about buying a home. I mean, for starters you’re just engaged right now.

When a lender requires a co-signer, it basically means they don’t believe you’ll pay back the money. And besides, you two don’t need a house now or right after you get married. The two of you should get married, and live in a decent, inexpensive apartment for a while. During that time, you both need to work hard on paying off all your debt. After that, save up an emergency fund of three to six months of expenses. Then, start setting aside cash for a down payment on a modest home.

When it comes time to buy a home, I recommend a 15-year, fixed rate loan with a down payment of at least 10%. Twenty% is better, because it will help you avoid having to pay PMI (private mortgage insurance). Make sure the monthly payments on the loan are no more than 25% of your combined take home pay. Keeping the payments at 25% or below will make it easier to address other important financial issues, like saving and investing.

Your aunt and uncle are obviously generous people, Evan, but they’re a little misguided in their offer. At this point, helping you two buy a house — something you obviously can’t afford —would be a huge burden instead of a blessing.

Dave Ramsey is America’s trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven best-selling books. The Dave Ramsey Show is heard by more than 11 million listeners each week on more than 550 radio stations and digital outlets. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

Dave Ramsey is America’s trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven best-selling books. The Dave Ramsey Show is heard by more than 11 million listeners each week on more than 550 radio stations and digital outlets. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

 

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Dave says: If you need a cosigner, you're not ready – Northeast Mississippi Daily Journal

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Dave says: If you need a cosigner, you’re not ready  Northeast Mississippi Daily Journal

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How to improve your credit score in 2021: Easy and effective tips

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If you’ve ever wondered “What is my credit score?” it’s probably time to find out. Having a good credit score can make life a lot more affordable. If you’re about to buy a house or car, for example, the higher your credit score is, the lower your interest rate (and therefore, monthly cost) will probably be.

Your number may also be the deciding factor for whether or not you can get a loan and ultimately determine if you are even able to buy something you want or need.

So, yes, the goal is to have the highest possible credit score you can, but increasing the number doesn’t just happen overnight. There are important steps to take if you want to increase your score, and the sooner you start working on it, the better.

“If you’re trying to increase (your credit score) substantially to accomplish a goal, you’re really going to have to have as much lead time as possible,” said Thomas Nitzsche, director of media and brand at Money Management International, a nonprofit financial counseling and education provider that advises people on how to legally and ethically improve their credit score on their own.

If you have fair credit and you’re trying to improve the number for a house purchase, for instance, you’ll want to start working on it at least a year in advance, he explained to TMRW.

But even though that sounds like a long time away, you can (and should!) start doing things right now to bump that number up. Below, see seven things you should do — and not do — to help improve your credit score:

1. Review your credit report

Review your credit report and look for errors that might be hurting your score. Morsa Images / Getty Images

The first thing you’ll want to do is pull up a copy of your current report so you know where you stand. You can get free reports from all three agencies — TransUnion, Experian, and Equifax — at annualcreditreport.com. Nitzsche said it’s important to take a moment and understand the financial snapshot of where you are today and where you want to be.

You’ll also want to take some time and look for any errors on your report, which could negatively impact your score. “If your name is misspelled, that’s not going to hurt your score,” he explained. “But if you see a late payment or missed payment (that’s in error), or maybe you have an account that should be reporting but isn’t, then that’s a problem and that will impact your score.”

If there is an error, you should dispute it and try to provide as much proof as you can.

One other thing: You can also ask a creditor to remove an issue if it’s been corrected (i.e., if you paid off a collection debt). Nitzsche said it doesn’t hurt to ask and the worst thing they could say is no.

2. Have good financial habits

“The biggest part of your credit score is payment history, so the most critical thing is never missing a due date,” Nitzsche said. Set up a monthly autopay or add all due dates to your calendar so you never miss a bill.

You can also achieve a higher score when you mix different types of accounts on your credit report. It may seem counterintuitive to get extra points for having debt in the form of student loans, mortgages and auto loans, but as long as you’re paying them off responsibly, it shows that you’re reliable.

3. Aim to use 30% or less of your credit at any given time

Know your credit limit and aim to only use 30% or less of it for a better credit score.Tim Robberts / Getty Images

Know your credit card limit, and try not to use any more than 30% of that number each month, otherwise your score could lose points for too much credit utilization.

Another thing you can do is ask your bank to increase your limit. “That will give you more flexibility to spend more,” Nitzsche said. You could also pay it off twice a month to keep the balance low. But he does warn that you never know when the balance is going to be reported to the bureau. It can happen at any point during the month, so it might be the day after you make the payment or the day before. “You don’t necessarily want to use the card and pay it the next day because that doesn’t give the bureau the chance to know that you’re using it,” he said.

4. Avoid requests for new credit

If you’re looking to increase your score around the time you want to buy a house or car, you won’t want to open up a new line of credit, like a retail card, credit card or loan. That’s because “hard” credit inquiries like those can lower your score, and sometimes it comes down to a few points over whether you’re approved or what your rate will be, Nitzsche said.

“Soft” credit inquiries, like when an employer checks your credit or when you pull your own report, won’t affect your score.

5. Keep all accounts open, even ones you don’t use anymore

Even if you don’t use that credit card from college, it’s a good idea to just keep it open because closing it could hurt your score. Nitzsche explained that you’ll be dinged some points for each account that is closed. If you want or need to mentally break up with a card, just cut it up instead.

6. Build your credit if needed

If you haven’t established credit yet, you might not even exist … in the credit report space, that is! “If someone has never fallen in delinquency on any subscriptions or utilities or never had collections on anything and they have not utilized credit cards or loans in the past seven to 10 years, they may not have a credit profile at all,” Nitzsche said. “That presents a challenge when you want to buy a home.”

If this sounds familiar, you may have to get a secured credit card where you put down a deposit, he advised. “You still have to make payments and use it responsibly. Not all banks offer them but you can usually check with your local bank or credit union.”

7. Reach out for help

If you want personal guidance on boosting your credit score, make an appointment with a credit counselor.kate_sept2004 / Getty Images

There are many apps and credit-monitoring services that can help you stay on top of your credit score. You could also reach out to a professional credit counselor who can help you navigate your specific situation. (Here’s a good resource about finding a reputable service.)

One last thing: Nitzsche warned that everyone should beware of credit repair scams that claim to be able to increase credit scores for an advance fee to get accurate negative information removed (even temporarily) from credit reports.

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