Get Out of Debt Guy

My Student Loans Went From Federal to Private

Posted November 7, 2013

WRAL Reader Question

Dear Steve,

I went to a University, earned a BS and MS in Architecture and Design. Had an extremely hard time finding work after college, like most. When i did find work, it payed far less than all projections the university or my own research showed. I am on an income based repayment plan.
 

  1. My loans started out as federal, overseen by the Department of Education, but were sold to Fannie May about 8 months ago. Are these still considered federal loans, or are they now private?
  2. Are the new rehabilitation regulations for new borrowers, or do they also apply to existing borrowers?
  3. Do the rehabilitation regulations have a long term timeline for repayment?
  4. Under such a repayment plan, what happens at the end of the repayment period, when the principal (and capitalized interest) have built up far beyond what was borrowed, with such a low payment each month?

Josh

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Dear Josh,

A federal student loan can't convert to a private student loan. The true status of your student loans can be clarified very quickly using the National Student Loan Data System. You can learn more about this online access and the link to use in this article.

The new student loan rehabilitation plan that will kick in in July will allow participants to get the same income based payment that is currently available on the federal student loan income contingent repayment plans. Rehabilitation plans are currently available for people who are in default on their federal student loan payments. The advantage of the rehabilitation approach is after nine payment the past negative credit history will be removed.Basically it is legal credit report manipulation.

The reliance on the formula to calculate the new student loan payment is both a good and bad thing. The good part is a lower payment is available. The bad part is you have to qualify annually for the new payment based on income. It is possible during your life your income will rise to a point where you will lose the reduced student loan payment.

The income based payment approach is nice and gives people struggling some breathing room but it is not a reduced way to eliminate your student loans unless you remain qualified under the program for the full 20 years and then at that time any balance remaining would be forgiven.

The danger is the forgiven balance can create a huge tax liability. For more on this issue, read this.

Steve Rhode
WRAL Get Out of Debt Guy

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About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.