Your Money: How to keep student loan defaults from ruining your life

LOS ANGELES (Reuters) - Dental hygienist Randy Honeycutt's $65,000 student loan balance has ballooned to more than $200,000 because of back interest and default fees, a cautionary tale about the perils of defaulting.

The 45-year-old North Carolina resident, who is convinced he will die in debt, has a simple message for the millions of Americans who are struggling to repay student loans: A default will haunt you for life. Do whatever you can to avoid it.

There is a growing audience for this advice, as more Americans are defaulting on student debt than ever before. A recent analysis by the Consumer Federation of America shows that defaults, officially defined as debts that are 270 days past due, increased 17 percent to about 1.1 million loans in 2016.

Like Honeycutt, borrowers often learn the hard way that defaulting triggers serious repercussions. For starters, the unpaid balance of the loan, plus interest, becomes due immediately.

Borrowers then become ineligible for further financial aid, deferment and forbearance programs. Their loans go to collection agencies that can assess fees as high as 25 percent of the outstanding balance, including interest.

The accumulated principal, interest and loan fees are subject to additional interest charges and more penalties if you delay repayment or default again.

"I feel like I’m watching the National Debt Clock, with the numbers spinning completely out of my control," Honeycutt said.

There is little you can do to avoid repaying. The U.S. government can seize wages, tax refunds and other benefits, all without getting a court order, said Persis Yu, a staff lawyer with the National Consumer Law Center.

Worse, she said, student loans generally are not dischargeable in bankruptcy, so this debt can follow you to the grave.

Still, these tips can help you to avoid ruining your financial life with a default.

* Track your own loans

The government used to help late payers avoid default fees if they made good on their payments within 60 days of receiving a notice of default, but it rescinded this guidance in March.

So the only way to avoid default is to track your own debt. If you have not received a bill when you think you should, contact the lender.

If you have government loans, you can find your details at the National Student Loan Data System (http://bit.ly/2nbDY1P).

* Ask for forbearance

If you cannot pay your government-backed loans because you are seriously ill, lost a job or went back to school, you can defer payments. If you have another financial hardship, you may also be able to put loans into “forbearance,” which also postpones payments. But interest is likely to accrue on any unsubsidized loan while payments are on hiatus.

* Request an easier payment plan

You may be able to sign up for one of the government’s income-contingent repayment plans, such as PAYE (pay-as-you-earn) or REPAYE (revised pay-as-you-earn), which set your payments at a percentage of discretionary income.

In some cases, you may have to pay nothing, but you do have to update your income information every year. Failure to do so can get you knocked out of these affordable repayment plans.

For private loans, you must deal directly with the lender.

* Get professional help

The toughest situations are where a borrower has such an unstable life, either because of medical or family problems, that he or she cannot pay, no matter how seemingly affordable the repayment plan, Yu said.

These borrowers should seek credit counseling, but they may have no choice but default. Yu's only advice here is to remain in default until your situation stabilizes enough that you are certain you will never default again.

That is important because federal rules give student loan collectors the right to assess a second round of penalties and interest with each default. Multiple defaults can cause your loan balance to balloon.

Honeycutt, who defaulted twice due to job losses, can attest to that.

“If they would come up with a payment that I could afford, I would be happy to do it,” he said. “As it is, given my ability to repay, $200,000 might as well be $2 million.”

(Editing by Beth Pinsker and Lisa Von Ahn)