I can’t afford my $1,100 monthly student loans

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Q. I am licensed as a registered nurse. I went to a private university to obtain my four-year degree, and I took out multiple federal and private loans. The federal loans are all in good standing. I can’t say that for the private loans, for which I had a co-signer who passed away. I can barely pay the $1,100 per month. If I default on the private loans, could they be charged off? Would my wages be garnished? Would it affect my nursing license?
— Still working

A. Paying $1,100 for student loans is a big nut.

You are correct in saying that private student loans do not come with the same flexible repayment options and borrower protections as federal student loans, such as income-based repayment options or forgiveness options.

But if you simply stop paying a private student loan, it will go into default – a risky financial move that is not recommended, said Lisa McKnight, a certified financial planner with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

First, the one piece of good news: Your nursing license is not at risk because New Jersey does not have a license suspension for default law in place, McKnight said.

McKnight said that while defaulting on debt can cause many serious problems and headaches, there is a six-year statute of limitations for student loans in New Jersey.

“This means that after the statute of limitations is up, lenders can’t take any legal action against you for the unpaid debt,” McKnight.

That means the lender can’t sue you to collect.

At first, this might sound like an opportunity to avoid your debt, but it’s generally not a good idea, she said.

There are other consequences to a default.

First, the delinquency will go on your credit report, McKnight said.

“It will generally stay on for seven years, damaging your credit score and making it difficult for you to borrow or even rent an apartment,” she said. “Your lender can send your debt to a collections agency that will likely contact you to try to get repayment.”

Before the statute of limitations on lawsuits is up, the lender may file suit against you for repayment, she said.

“If a court judgement is granted the lender can obtain a wage garnishment order, which in New Jersey could be as high as 25 percent of disposable pay,” McKnight said. “They can also seize assets and place liens against your property.”

The lender can add collection charges to the amount owed, which typically will increase the loan balance by 25 to 40 percent, she said.

Note that bankruptcy probably isn’t a way out because private student loans, like federal education loans, are almost impossible to discharge in bankruptcy, McKnight said.

Your best bet is to prevent these harsh consequences by avoiding a default and dealing with your lender, she said.

“State that you cannot afford the loan payments and ask them for new repayment options and if they offer forbearance – temporarily postpone payments – to help you catch up and avoid a default,” she said. “You also may be able to refinance and consolidate your debt to get a lower monthly payment or extended terms.”

However, McKnight said, once the loan is delinquent, your credit score will take a hit, making it more difficult for you to secure a new loan. It’s best to try this method before you miss payments.

Also, you mentioned that your co-signer passed away. This could have possible ramifications on your loan, so alert your lender and see if it can be used as a tool to refinance to a lower rate and/or a longer term.

McKnight said aside from what your lender can offer, there are some things you can do to improve your situation. They include a bare-bones budget – focus only on your needs and debt repayment – and perhaps consider a second part-time job.

In the event that you do default and your loan goes to a collection agency, you may be able to negotiate a settlement of your student debt but only after the loan has already defaulted, she said.

“Contact the debt collector and ask them how much it would take to settle the debt,” she said. “This may work best if you have some cash you can offer right away as a leverage in your negotiations.”

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This story was originally published on June 26, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.