Expert breaks down what start of student loan default collection means for borrowers

Welcome back. Today, the Trump administration is restarting collection of defaulted federal student loans. It's part of a broader effort to roll back forgiveness policies and dismantle the Department of Education. Michael Nguyen-Chwander from Outlook Wealth Advisors joins us live with what this means for roughly 5.3 million DOT borrowers. Michael, good morning. Let me ask you first to just start off by giving us some of the context for this, because borrowers haven't faced penalties for nonpayment for a while, right? Yeah, so going all the way back to 2020 is when they initially, in the pandemic, allowed people to stop paying on their student loans, and really they have not enforced or done anything since then. Beginning almost about fall of 2023, they began to tell people, okay, it's time to start repaying student loans. But up until now, there's really been no enforcement of that. So this is the first time in five years where they're actually taking action for people that are in default. So when we say the government today is going to start involuntary... So it means the same mechanisms that they use to collect on people that owe taxes, or in the state of Texas, people that owe on child support, they can use that part of the treasury to actually begin confiscating part of people's paycheck. Or social security, if they're collecting government benefits, or as mentioned, if you were expecting a tax refund, so they're actually using those mechanisms to begin involuntary collections, just as it sounds, meaning to take money from people's checks. Now, we know the key here is people who are in default. It's a good idea to check your status with whoever is servicing your loan, right? But then after that, how can you avoid defaulting, even if over these past five years, your habits have changed and you can't perhaps afford to pay the full amount right now? Yeah. So there are some ways to avoid it. And to be clear, I mean, default basically means you haven't paid in more than nine months. And so, but there are some ways to avoid it. One is what's called an income-driven repayment plan. So I mean, first step, reach out to your service provider. So even though it's obviously a federal loan, in many cases, you've got a separate service provider. And income-driven repayment plans are basically there to say, if you truly can't afford to pay the full amount or the full payment, begin to pay something. And so they're able to look at your income, look at what you owe, and try to work out something that would be affordable so that you can get out of default, get back on the path, and therefore head off any other sort of collections to go with it. If you don't qualify for that, there are two other quick mechanisms. So one is what's called deferment. Deferment basically pauses the payment and it pauses the interest. So again, it says if you have a temporary issue going on, or you can get back on your feet, here in the near term, then they will work with you on deferment. Or forbearance is similar, but they're not pausing the interest. They're pausing the payment, but that interest will still accrue and add up. Okay, so that's good information to let people know about. I'm curious, there probably are some people who may be in a better financial situation now than there were five years ago. Are there any real benefits to being more aggressive with repayment, if that's a possibility for you? Yeah, there certainly are. I mean, so again, in most cases, the interest is accruing no matter what. And to give a little idea, if somebody came out of college with, let's say, a $40,000 loan and it had interest of almost 7%, they're really going to be paying more like $50,000 just over the course of seven or eight years. So some good strategies, if you're paying the interest, would be at least pay as enough to cover the interest so you're not adding to the actual debt. Even for students who are certainly in college, if you have the ability to even pay a little bit, if you're working part time, that helps when you get out. You're not adding all the interest to what you owe, you just have to pay on actually what you actually borrowed. So the key thing is begin to pay something. If you have the capability, that way you're not going into default, you're not completely ignoring the issue. Those are the cases that they're really going to go after with this issue of confiscation and beginning to collect funds. Okay, so a good piece of advice there as well. Before you go, Michael, I want to ask you as well, when it comes to restarting these payments or trying to get yourself out of default, how should people prioritize student loan repayment if they have other goals, of course, like saving for a down payment on a home, maybe trying to get a car? We know that financial times are a little bit stressful for all of us right now, but what should the priorities look like with this? Yeah, so as we know over the past several years, obviously the prior administration had tried to do a lot of student loan forgiveness. Some of it worked, of course, blocked some, but current administration certainly is less lenient or doing less in that area to help people. So when you look at priorities, I think the first thing is to at least be paying something because going into default, while it may not necessarily hit your credit right away to impact auto loan or home purchase, having that debt out there definitely does make those other things more difficult. But also because they have those programs of the income-driven repayment, the deferment, the forbearance, quite honestly, I'm not telling people to put it on the back burner, but it is a little more forgiving in terms of getting a home loan so you have a place to live or if you have to buy the auto so you can get to and from work. Quite honestly, those things are more the priority, so long as somebody is doing that within budget. Don't go buy the BMW if you don't need the BMW. Get something a little more modest so that you can begin working on paying off that student loan. And as we know, Michael, there are always people out there who are looking to take advantage of situations like this. Predatory loanmakers, scammers, fraudsters. What are just some red flags to look out for if people are in a situation where they're starting to feel strapped and they're looking for help, but maybe in some of the wrong places? Yeah, one of the big flags or big things to keep an eye on when it comes to federal student loans is the way the system works. One, you can consolidate loans, so if you have several, first work with your existing servicer, but then you can look to consolidate loans to make it more manageable. You can typically redo terms, so whether it's a 10-year payoff, you could extend it to 15 or 20 if you needed to, although obviously you'll pay more in interest for the long run. But one of the big things to look for is if you have loans, you probably do not want to consolidate or redo those with a private institution. So private loans do not have all the same rules or benefits that federal loans do. So in the student loan area, that is one of the big red flags. If you have federal loans, you probably want to make sure they stay federal loans. Unfortunately, if you already have a private loan, you need to work directly with that lender because you're not allowed to take private education loans and turn them back to federal. Okay, so a really good piece of information there. Michael Nuneswander with Outlook Wealth Advisors, thank you so much for your time and that good info this morning. Thank you.