Question: I’m posting this for anyone who would like to go back to college but can’t get student aid because of a defaulted student loan from the past. This will help those who are interested in going back, but cant afford to pay the defaulted loan off at this time. I fould a site where you can apply for a “Consolidation Loan”, and can be approved, regardless of current income, credit report and even if you have a student loan that is in default! For more info, Go to: http://loanconsolidation.ed.gov/faq.shtml#default To apply, go to: https://loanconsolidation.ed.gov/appentry/appindex.html I know it sounds impossible, but I did it and will be starting college on Jan. 8th. I searched for a long time for this info and hope it helps someone else. Merry Christmas All > I fould a site where you can apply for a “Consolidation Loan”, and can > be approved, regardless of current income, credit report and even if > you have a student loan that is in default! > For more info, Go to: > http://loanconsolidation.ed.gov/faq.shtml#default

Answer: thanks for this information. Apparently this is part of an effort by the Clinton administration to make college more affordable and save students $600 million over a five-year period. Major banks have sued the administration to stop the program, on grounds that this places the banks at a competitive disadvantage vis-a-vis the government. See http://www.ed.gov/News/001215.html.

My first regret is that plan has only become available relatively recently. There would seem to be some risk that the new Bush administration will wipe it out. I don’t know that they will; I only know I heard some talk about eliminating the Department of Education, in which case it seems unlikely that this plan would survive.

After reading this site, I had some questions, so I clicked on “Contact Us.” The site popped up a little note, which I appreciated, indicating that the information I was about to provide might not be secure on the Internet. The note said that I could instead call the Department of Education at 800-557-7392. Of course, some people might be reluctant to call an 800 number, knowing that the company paying the bill for those 800 calls (in this case, the DoE) can then review the list of phone numbers from which these calls are made and could perhaps provide those numbers to bill collectors or lawyers.

According to the site, if you presently have defaulted loans, you can qualify for a consolidation loan by making a “satisfactory” repayment agreement with your current loan holder or by agreeing to repay the loan under the Income Contingent Repayment Plan. Since most struggling borrowers are well aware that everything would be fine if only they could maintain a “satisfactory” repayment plan, the Income Contingent Repayment alternative may be especially interesting for some readers of this newsgroup.

One of the questions I had was this: am I correct in reading this website as saying that collection costs will be capped at 18.5% of the outstanding principal and interest on the loans being consolidated? If so, that could go far toward meeting the objections of borrowers whose loan amounts have increased by 50% or more solely because of inflated, bogus collection fees.

On the other hand, it appears that signing a consolidation loan agreement might eliminate any future option to challenge your collection fees. This matters if (a) you think your actual collection fees should be less than that 18.5% figure or (b) your loans are not Direct Loans or FFEL Loans, in which case there is no 18.5% cap.

Under the Income Contingent Repayment Plan, your maximum repayment period is 25 years, starting now. After that, any portion remaining unpaid will be discharged. Interest continues to accumulate right up until the end of that 25 years or until the loan is repaid, whichever comes first. You (and your spouse, if married) agree to let the IRS inform the DoE of your (and your spouse’s) income. Apparently the DoE will then decide how much you can afford to pay. The maximum payment will be 20% of your combined discretionary income.

Discretionary income is defined as the difference between your Adjusted Gross Income and the poverty level for your family size. Adjusted Gross Income on an ordinary tax return is basically your gross income minus (a) your deductible contributions to an IRA, (b) student loan interest deduction, (c) medical savings account deduction, (d) moving expenses, (e) certain self-employment expenses, and (f) alimony.

There are different poverty levels, and I’m not sure which one they use. For purposes of discussion, I will use the one in table 762 of the 1999 Statistical Abstract (see http://www.census.gov/prod/99pubs/99statab/sec14.pdf). If you are a family of one under age 65, your poverty level was $8,350 in 1997, and was increasing at a rate of around 2-3% per year, so let’s say it will be somewhere around $9,000 this coming year. The poverty level for a two-person household might be around $11,700; I’d guess $13,800 for three people, and $17,700 for four.

Now, there are many interesting people who earn less than $20,000 per year. I believe Ralph Nader’s salary may still be less than that, as are the salaries of certain lawyers, medical professionals, schoolteachers, ministers, and others who could not have gotten their jobs without a college degree. I appreciate the Income Contingent thing as a well-intentioned first step; I am just not sure how far it goes toward the actual situations of people who are struggling with their student loans. As you say, it did work for you, and I certainly hope it works for others.

On the other hand, if a person’s reason for not being able to keep up with their student loans is that they didn’t obtain a marketable skill from their college education, or if you’re in bad health or for some other reason aren’t having much luck finding and holding a steady job, presumably you would not have to make any payments if your own income keeps you down around the poverty level and/or if you are homeless or are supported by parents or some other person.

Exception: if the person supporting you is your spouse, as is the case with some people I have talked to, then you run into a whole new kind of marriage penalty. Basically, your spouse faces a choice. If s/he has student loans, s/he doesn’t have to consolidate them with yours, but the fact that s/he is making payments on his/her own student loans will not alter the fact that 20% of his/her discretionary income will still be required for your student loans. If the combined burden of two sets of student loans would be too much, s/he could include his/her student loans in the consolidation plan. This would limit his/her total student loan payments to the ceiling of 20% of discretionary income. Problem: if you do this, each of you will then be responsible for repaying the full amount of the combined consolidation loan, even if you become separated or divorced or if one spouse dies. This creates a market for divorce insurance (if there is such a thing). Or perhaps it just creates a market for divorce.

At this point, I’m thinking of a guy I was talking with a little while back. His student loans, with fees and penalties and interest, are over $100,000. He has a job paying approximately minimum wage. But his wife has a decent job. I don’t know her Adjusted Gross Income, but let’s say it’s $35,000. I don’t know if he has kids, but let’s assume not. $35K minus a $12K poverty level equals $23K; therefore the wife would be tapped for about $4,500 per year if they agree to a consolidation loan for him. So in addition to feeling useless for making no money and having mental health issues, he makes his wife pay $400/month for his student loans? I don’t think so!

I can see the benefit of getting out of default status, if you want to be able to go back to school and qualify for more federal loans, and if you think that more schooling will help you pay for all this. But if you’re just a working person, or a wannabe working person, I’m not entirely sure this consolidation thing is better than having your wages garnished. Probably depends on your income, and on the laws of your state covering garnishment. I guess it may also depend on whether your payments will ultimately fail even to keep up with the interest on your loans.

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