What To Do If Your Child Has Defaulted On A Loan You Cosigned

Because most students may not have the credit necessary to be approved for a student loan, many parents find themselves in a position where they need to cosign for their child.

While a lot of financial advice says it's too risky for parents to cosign, the reality is parents want to see their children go to college and will often do whatever it takes to see that dream come to fruition.

As a cosigner, the parent is also responsible for the debt, so there are consequences for them if a child defaults on the loan. If left unresolved, defaulting can lead to lower credit scores and the potential garnishment of wages for both the parent and child.

It can also affect future employment opportunities. Depending on some restrictions and state law, employers may also look at credit history as a part of the application process. In the employer's eyes, defaulted student loans could show lack of responsibility and could block a job offer for the parent or child.

While the cosigner should be notified of a missed or late payment by the loan provider or servicer, there are cases in which this may not happen. Here's how you can tell if your child may have defaulted on their student loan and what you can do to repair the situation.

"If a parent has noticed their credit score take an inexplicable hit, they may need to see what is going on with their child's student loan," said Fausto A. Rosales, a consumer litigation attorney based in Miami who handles student loan repayment cases.

Rosales said this is how most parents find out about defaulted student loans, especially if for some reason they haven't received a late or missed payment notice from the student loan provider or servicer.

"Often times, the children are afraid to let their parents know what's happening," said Rosales. Parents may want to encourage conversations with their child about the status of the loan. Open communication like this can make all the difference when trying to avoid defaulting on student loans.

The student "may have also used the address they had while they were in school instead of their home address." Parents should confirm that the loan provider and servicer have both the cosigner's and borrower's correct mailing address. Additionally, parents can often get access to manage the account online and stay on top of the loan.

As soon as a parent discovers that their child has defaulted on the cosigned loan, they must call both the loan provider and servicer, if they are different.

"A loan servicer's main goal is to get someone on a payment plan that makes sense for both the person and the company," said Rosales.

This means you should work with the servicer to reach a payment arrangement or settlement that you and your child can feasibly pay back.

After agreeing on the repayment terms, it's time to consider repayment strategy. At this point, parents sometimes take a more active role in paying back the loan.

"One method I've seen parents use when their child has defaulted on a loan is having the parent take over the loan payments and then having the child pay the parent directly each month," said Rosales.

If the loan has reached the point of acceleration and the entire balance is due, the parent can consider taking out another loan in their own name to pay off the defaulted loan. Then the child can pay them back. It's not ideal, but it does happen, albeit rarely.

There's no doubt that having your child default on a student loan you cosigned is frustrating and stressful. But it's often fixable. The main thing to keep in mind when it comes to defaulting on student loans is that you can work with the servicer on a settlement. All parties involved want the same thing - to have the debt paid off.

If My Student Loans Are in Default, Can My Husband's Income Tax Be Taken Also?

Whether a lending institution can take your state and federal tax refunds for your defaulted student loans depends on the tax filing filing status you and your husband select. Which tax refunds are subject to a tax refund intercept also depends on whether your defaulted student loans are from the federal government or from a private lender.

If you and your husband file your taxes as married filing single, only your income tax refund is subject to an intercept or garnishment. If you have defaulted federal student loans from the U.S. Department of Education, the department may take both your state and federal income tax refunds. If you have a student loan from a private lender such as a bank or credit union, the bank or credit union may only take your state tax refund.

If you and your husband file your taxes as married filing jointly, your entire joint tax refund is subject to intercept or garnishment even if the student loans belong solely to you. However, your husband may file IRS Form 8379 -- Injured Spouse Allocation -- to receive his portion of your joint income tax refund. Your portion of the income tax refund will go toward paying your defaulted student loan debt. Your husband can also file an Injured Spouse Allocation form to receive his portion of your joint state tax refund. Contact you state income taxing agency to find more information on your state’s specific injured spouse forms.

The IRS and your state income taxing agency will calculate the portion of income taxes you paid and the portion of income taxes your husband paid based on your individual incomes. They will apply all credits and deductions accordingly. For example, if your combined income is $100,000 per year and you and your husband each earned $50,000, then you are each entitled to 50 percent of your applicable tax credits. Once the taxing agency recalculates your income tax refund, your husband will receive the refund allocated to him and yours will go toward paying your student loan debt.

How To Tell If Your Student Loans Are Private Or Federal

One of the most common issues I run into working with student loan borrowers is trying to find out if the loans are federally or privately backed. It can actually be pretty difficult to find out, since some companies like Navient/Sallie Mae service federal loans but also originate their own private loans. Fortunately, there are a few ways to verify whether the loans are federal or private. It’s important to know, since options for dealing with federal and private loans vary greatly.

The best way of determining whether loans are federal or private is to log in to the National Student Loan Database, at www.nslds.ed.gov. The Department of Ed. makes it clear that only individual borrowers are allowed to log into this site, not third party companies or financial advisors. If you’re a financial advisor, you can request that your client take a screenshot, but you’re not allowed to log into this database with your clients information.

To log into the NSLDS, you’ll also need to create an FSA ID if you don’t already have one. Luckily, you can set up your FSA ID on the NSLDS site as well. The FSA ID was created to replace the FAFSA PIN as a more secure login method. If you need assistance, click here to download my free FSA ID Setup Guide.

Once you’ve created your FSA ID, you can log into the NSLDS database which will show a detailed readout of your federal student loans. Since it will only show federal loans, you can use the process of elimination to find out which loans aren’t showing. If a loan doesn’t show up in the NSLDS database, nine times out of ten it will be a private loan. Very rarely, federal loans may not show up in the database due to some kind of reporting error. But usually you can deduce that any loans not showing up here will be private loans.

How to find out if my student loans are in default

In addition to finding out what types of loans you have, the NSLDS database also provides a lot of data on your federal loans; including the history of your loans, who your loan servicer is, and dates of origination.

Another way to view your federal loans is through the studentloans.gov site. As with the NSLDS, the Dept. of Ed. has clear warnings that only borrowers themselves can log into this site. You will also need your FSA ID for this site. The studentloans.gov site is where you can apply for Direct Consolidation and income-related payment plans, and it also shows a readout of your student loans.

A big difference between studentloans.gov and nslds.ed.gov is that the studentloans.gov site will show your interest rates, whereas the NSLDS does not. However, the NSLDS will show a more detailed view of your loans and provide more data. The studentloans.gov site will show more repayment options and includes a repayment estimator that you can use.

How to find out if my student loans are in default

Another way to determine what types of loans you have is by accessing your credit report. You can get a free credit report annually at www.annualcreditreport.com. There are no strings attached – this is the free site to get your 3 bureau credit report that all US citizens are allowed to access once per year. It’s not always easy to tell federal from private loans on a credit report, but generally a federal loan will say “US Dept. of Ed” or something similar; while private loans will show up the same way as any other type of unsecured debt. If you see a “charge off” for a student loan, that means that it’s private, because this is a mechanism that only occurs with private student loans. A federal loan will list as defaulted or another related term if it is more than 9 months behind, but it will never say “charged off”.

For borrowers looking to settle their private student loans, it’s important to make sure the account you’re trying to settle is not a federal loan; since they rarely settle for any significant reduction. For instance, if you want to settle Navient private student loans, you’d want to make sure that they are privately backed – since Navient services federal loans but also originates private student loans. For other lenders, it’s easier to tell from a credit report whether they are federal or privately backed. For example, the National Collegiate Trust is strictly a private student lender. So is Chase, Wells Fargo, and Discover Bank. While those entities also serviced federal loans in the past, as of 2015 they are no longer registered as federal loan servicers. So any student loan you see for Chase, Citi, Discover, or Wells Fargo is most likely a private student loan.

On the flip side, NelNet, Great Lakes, Mohela and FedLoan Servicing are almost always federal loan servicers – although NelNet has begun to acquire private loan porftolios in the last several years. Besides Navient, there are other companies that service federal loans and private loans at the same time. AES and ACS are two examples of loan servicers who handle both types of loans. That can make it difficult to figure out whether they are federal or private, but by following the steps outlined above you should be able to tell which is which.

Determining whether a student loan is private or federal is the first step to finding out how it can be modified or resolved. If in doubt, I always instruct my clients to use one or several of these verification methods so that we know for sure what type of loan we are dealing with. Then you can formulate a strategy on how to move forward, since the options available for federal and private student loans are radically different.

How to avoid becoming one of the million Americans in student loan default

By Student Loan Hero 1:46 pm EDT April 10, 2017

How to find out if my student loans are in default

Student loan debt has become so serious that more borrowers have defaulted on their student loans than ever before.

Rohit Chopra, a senior fellow at the Consumer Federal of America, crunched the numbers on student loan default. His analysis revealed that 1.1 million students defaulted on their Direct Loans last year. From 2015 to 2016, the number of borrowers in default increased by 17 percent.

These stats don’t even include borrowers with student loans other than Direct Loans, such as private student loans. Clearly, even as important numbers such as the unemployment rate improve, graduates are still struggling to handle their burdensome student debt.

Going into student loan default can make a bad financial situation even worse. Learn about the consequences of default so you know why you need to avoid it at all costs.

1. Your credit takes a hit

Your student loan is officially considered to be in default when you go 270 consecutive days without paying. At this point, the loan servicer springs into action to collect payment.

First, your defaulted student loans are reflected on your credit report. Your report will show a delinquent account and your credit score takes a hit as a result.

A poor credit score can make it difficult to rent an apartment, get approved for student loan refinancing, or take out a mortgage or car loan.

2. Debt collectors start calling

Second, your loan goes into collections. Once it’s in collections, debt collectors could call you at all hours of the day to collect repayment. Debt collectors might even call friends, family, or your workplace to get in touch.

Don’t let debt collectors bully you, though. Learn how to protect your rights if you do have an account in collections.

3. The government garnishes your wages

The government can also garnish your wages, tax refund, and even Social Security benefits if you default. In fact, up to 15 percent of your disposable pay could be garnished and put it toward your loans.

Unfortunately, wage garnishment often doesn’t help reduce your loan debt much. More often than not, garnished wages pay down interest, leaving the loan principal untouched.

So if you had trouble paying before, defaulting on student loans will only make the debt less manageable. Unpaid debt continues to grow thanks to compound interest.

Many students default under the impression that the government will eventually discharge all student loans. While the debt crisis is severe — collectively, borrowers owe $1.3 trillion — all that debt won’t just go away.

Here are the steps you can take if you fear you’re in danger of defaulting on your student loans.

1. Ask about income-driven repayment plans

Most borrowers who go into default don’t make enough money to handle their student loan payments. Chopra found that federal debt has grown 16.5 percent since 2013 and borrowers owe an average of $30,650.

If you can’t make your monthly payments, ask your loan servicer about an income-driven repayment plan. The government offers a number of repayment plans for borrowers who can’t afford their student loans.

Programs such as Income-based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) cap your monthly payments at 10 to 15 percent of your discretionary income. After 20-25 years of on-time payments, any remaining student loans will be forgiven. So there is a light at the end of the tunnel.

2. Consider loan deferment or forbearance

If you can’t afford your loans, you might be able to pause repayment. You would need to request either deferment or forbearance.

To qualify for deferment, you must fulfill certain requirements. Being enrolled in graduate school or facing unemployment would both count. Depending on your circumstances, your loans may or may not continue to collect interest during deferment.

Forbearance is your other option if you’re facing financial hardship. If granted, you can pause repayment for up to 12 months. However, all your loans will keep collecting interest.

Borrowers should be very cautious about both these options. When left unpaid, student loans can grow insurmountable over time.

3. Look into loan forgiveness programs

If you’re still figuring out your career, consider one that qualifies for loan forgiveness. The Public Service Loan Forgiveness program, for instance, forgives loans after 120 payments (beginning after October 2007). You need to work in a government agency, non-profit, or other qualifying organization.

The government also offers forgiveness programs for certain occupations, like teaching and nursing. Plus, states have forgiveness programs for people in a variety of professions.

You’ll need to commit a certain number of years to working in a qualifying facility or area. But if your loans are already in default, they typically won’t qualify for loan forgiveness.

What to do if you’re already in student loan default

If you’ve already gone into default with your student loans, you have options to get out:

  • Rehabilitation: A loan rehabilitation program will cap your monthly payments at 15 percent of your income. After 10 months, you’ll be out of default.
  • Consolidation: With a Direct Consolidation Loan, you’ll pay a single monthly payment with a fixed interest rate. Before you can apply, you must make three on-time monthly payments.

Once you’re approved, you’ll be out of default. And your new plan will be based on your income, so the monthly payments shouldn’t be too burdensome.

If your loans feel insurmountable, speak with your lender about income-driven repayment plans. And if you’re already in default, find out what you can to do to rehabilitate your loans.

Even though defaulting on student loans is more common than ever before, the decision to do so ultimately hurts you more than anybody else.

If You Have Defaulted Student Loans, Here's How to Avoid Losing Your Tax Refund

If your student loans are in default, you’re probably worried about your tax refund. Will the student loan lenders take it?

First, let’s set the record straight on private loans. Private student loan companies can’t take your tax refund. The lender may be able to take money from your bank account, but that’s only if they’ve sued you and won a judgment.

If your Federal loans are past due the government can’t do anything until you’re in default, which happens only when you fail to make a payment for 270 days.

If you’re in default, the government can seize your tax refunds through a tax refund offset. Before that happens, the lender or servicer has to give you notice of the proposed offset and an opportunity to review your loan records.

You can challenge the offset at any time, but if you want to put it on hold while you’re challenging it, you have some deadlines.

  • If you want to see the loan file you have to make your request in writing within 20 days of the notice.
  • If you want to request for review and put the offset on hold then you have to make sure it gets there no later than the later of 65 days after the date of the notice or 15 days after you request to see your loan file.

You can request a hearing after these deadlines, but the offset will generally not be held up while you are waiting for your hearing.

There are a number of defenses available to a tax refund offset, and they mirror the ones for defending an administrative wage garnishment. You may also be able to challenge your offset if it will cause financial hardship.

To find out if your tax refunds are subject to offset, contact BFS’ Tax Offset Program call center at 800-304-3107 or TDD 866-297-0517.

If you filed a joint return and it’s not your student loan, you can request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation with your original joint tax return, your amended joint tax return, or by itself after you’re notified of an offset.