Erin Fox received a piece of bad news a few months ago, and it wasn’t entirely unexpected. Despite juggling two jobs since graduating from the University of Maryland in 2008, she was approaching a default on her student loans.
During the week, the 31 year-old puts her degree in sociology and gender studies to work managing victim outreach and a 24-hour hotline for a non-profit that supports survivors of domestic violence. On weekends, she works in retail. The second job was supposed to help her put extra money toward her student loans. Still, she wasn’t able to keep up with the payments.
“I felt like such a failure, like all that effort didn’t pay off. I worked another job. I work every weekend. I didn’t have a day off. And to think that that didn’t work. It was hard,” says Fox.
The collection agency offered her a compromise: Pay a settlement amount of $25,092 within 90 days. Even if she put every penny she earned toward the settlement, it would take Fox nine months to reach that number.
Fox’s hectic work schedule meant she didn’t have time to wallow in self-pity. Within a day or two, she had formulated a plan. She recalled a recent conversation with friends about creating an account on popular crowdfunding site GoFundMe to pay for graduate school. With her loans in default, grad studies were out of the question, but maybe the strategy could help her current situation.
“I was already pretty humbled,” says Fox. "Once I defaulted, it was just like well, I might as well go for it,” she says.
Some 25 percent of borrowers are struggling to keep up with their payments, according to the Consumer Financial Protection Bureau, and many of them are resorting to desperate measures like crowdfunding and loan forgiveness plans for relief. Since 2012, over 600,000 Americans, or 11.8 percent of borrowers failed to make loan payments for 270 days, landing them in default.
“This debt isn’t really diminishing,” says Jeffery Scholnick, a Maryland-based attorney who often works with clients trying to get a handle on their student loans. “People are just treading water unless they make enough or if they have the family support where they can throw decent money at it every month,” he adds.
Once a borrower has defaulted, their entire loan balance, plus interest and applicable fees, becomes due immediately. For federal loans, the government can garnish wages and tax refunds to collect the amount owed. Recovering from default can take years.
Being proactive can lead to new options for student debt relief. Scholnick says borrowers should contact their lender the first time they have trouble making a payment. “Programs are changing all the time, so it’s worth checking in regularly. There could be new avenues for working with some of these debts. It’s always worth asking and then asking again and then asking somebody else,” he says.
An income-based repayment plan is more effective than a crowdfunding campaign as a way to manage a large debt burden. Even so, in mid-November, GoFundMe had 6,666 results for student loan related campaigns, with new ones popping up every day. Most have very little, if anything, raised toward their goal.
Sara Margulis, CEO and founder of the crowdfunding websites Plumfund and Honeyfund, says she has noticed a recent uptick in education-related campaigns. The most common campaigns are hardship pleas from graduates struggling to pay off large student loans, as well as graduation funds for high school or college seniors. “The graduation funds are definitely raising money whereas the hardship pleas are not,” she says. Only half of the education-campaigns on Plumfund raised money, and those that did focused on funding education beforehand, rather than paying down student loan debt.
Fox’s crowdfunding campaign has been uniquely successful. When Fox shared her GoFundMe page on her Facebook profile in August, the money started flowing almost immediately. “This is my responsibility. I agreed to pay this money back. It isn’t anyone else’s problem but mine,” Fox says. Her voice breaks as she adds, “But I appreciate that other people were willing to help me.”
Her friends contributed and shared the link. Her friends’ parents did the same. “I was blown away. I thought I was going to raise $300. I did not think I would get any chunk of this from the GoFundMe,” she says.
Most people who give to crowdfunding campaigns are looking for a cause they can further, according to Avi Daman, CEO of Edco, a fundraising platform for K-12 schools. Those are the campaigns that tend to garner more support. “Be honest and focus on the value that you’re bringing, instead of a sob story,” he recommends.
After two months, Fox has raised over $16,000 toward the $25,092 she needs to come up with by January 2016. About 65 percent of that has come from friends and family and another 10 percent has come from acquaintances and professional contacts. A whopping 25 percent has been donated by complete strangers. Some people contributed through the crowdfunding site, while others used paypal or sent checks to avoid the 5 percent fee that GoFundMe charges.
All of the money raised for Fox’s campaign is considered a gift for tax purposes, meaning she does not have to pay income tax on the funds. As long as a donor does not exceed the annual gift tax exclusion, $14,000 in 2015, no taxes are owed on the contribution either.
Paying the full settlement amount to the collection agency doesn’t guarantee Fox will be done with the debt, unless she gets it in writing ahead of time. “She can ask that she be given an order of satisfaction at the end with the language that it has been paid in full,” Scholnick says. She may have to pay taxes if any portion of the original loan is forgiven, but it will look better than having a default on her credit report.
Fox views her campaign as a type of privatized grant, but she's not only relying on the generosity of her network. She’s doing everything she can to meet her obligation so she can move on with her life. She and her fiancé have sold items they own to reach the goal, from clothing to musical instruments. Fox also plans to cash in her 403(b), which will add another $2,000 to her total.
“If I am short and I get close enough, I will sell my engagement ring. I’ll try not to, but if it came down to a $1,000 versus me having this ring, I would rather pay off the loan.”