|
This section provides information to students who are thinking about
not paying on their loans. It summarizes the consequences of not paying,
gives advice on how to avoid it and, if you're already in default, how
to get out of it.
You are responsible for repaying your student loans even if you do not
graduate, have trouble finding a job after graduation, or just didn't
like your school. If you do not make any payments on your student loans
for 270 days and do not make special arrangements with your lender to
get a deferment or forbearance, your loans will be in default.
Defaulting on your student loans has serious consequences.
Federal Guide to Defaulted Student Loans
The US Department of Education Debt Collection Service publishes a
guide called
Guide to
Defaulted Student Loans to help students repay their defaulted
student loans. For more information on repaying a defaulted loan, call
1-800-4-FED-AID (1-800-433-3243) or 1-800-621-3115.
Other helpful web sites include:
Consequences of Default
If you default on your student loan:
- Your loans may be turned over to a collection agency.
- You'll be liable for the costs associated with collecting your
loan, including court costs and attorney fees.
- You can be sued for the entire amount of your loan.
- Your wages may be garnished. (Federal law limits the amount that
may be garnished to 15% of the borrower's take-home pay.)
- Your federal and state income tax refunds may be intercepted.
- The federal government may withhold part of your Social Security
benefit payments. (The US Supreme Court upheld the government's
ability to collect defaulted student loans in this manner without a
statute of limitations in Lockhart v US (04-881, December 2005).)
- Your defaulted loans will appear on your credit record, making
it difficult for you to obtain an auto loan, mortgage, or even
credit cards. A bad credit record can also harm your ability to find
a job.
- You won't receive any more federal financial aid until you repay
the loan in full or make arrangements to repay what you already owe
and make at least six consecutive, on-time, monthly payments. (You
will also be ineligible for assistance under most federal benefit
programs.)
- You'll be ineligible for deferments.
- Federal interest benefits will be denied.
- You may not be able to renew a professional license you hold.
And of course, you will still owe the full amount of your loan.
Preventing Default
- Make sure you understand your options and responsibilities
before taking out a loan.
- Make your payments on time.
- Notify your lender or servicer promptly of any changes that may
affect the repayment of your loan. If you move or change your
address, let them know. Likewise tell them about name changes (e.g.,
because of marriage), graduation or termination of studies, leaves
of absence and transfers to another school.
- If you encounter financial difficulties, consider applying for a
deferment or forbearance on your loans. It is better to defer your
payments than to go into default. Ask your lender about these
options while you are still making payments, before you default on
your loan. You won't be able to get a deferment or forbearance after
you default.
- Consider using a consolidation loan to combine all of your
educational loans into one big loan. This lets you send your
payments to just one lender. You may also be able to extend the term
of the loan in order to reduce the size of your monthly payments.
- Keep careful records regarding your loan. Put copies of all your
letters, canceled checks, promissory notes, notices of disbursement
and other forms in a file folder.
Getting Out of Default
To get out of default, you need to make arrangements with your
servicer or lender to repay the loan. Once you have made six consecutive
full voluntary on-time payments, you will be eligible for additional
Title IV aid. On-time is defined as within 15 days of the due date.
Voluntary excludes payments made by garnishment or other offsets. After
you have made 9 of 10 consecutive payments within 20 days of the due
date and applied for and received "rehabilitation", you will no longer
be considered in default. At this time record of the default will be
removed from the reports to credit reporting bureaus.
For loan rehabilitation, the payments must be "reasonable and
affordable". This is determined by the guarantee agency, and will
consider the borrower's (and his/her spouse's) disposable income and
financial circumstances. It can be below the required minimum payment of
$50 or the interest that accrues, whichever is greater, if the guarantee
agency determines that a smaller amount is reasonable and affordable
based on the borrower's financial circumstances.
Also, if the default is very recent, the lender may not yet have
reported the default to a guarantee agency. Lenders do not need to file
a default claim until 90 days after the default occurs. If the borrower
brings the delinquency under 270 days (the definition of default) within
the 90-day period, before the lender has filed a default claim, they can
cure the default.
It may also be possible to cure the default by consolidating the
delinquent loan before the lender has filed for a default claim. Since
the consolidation loan is a new loan and it pays off the delinquent
loans, it effectively wipes the slate clean.
For information about your options, contact the servicer of the loan
and/or the original lender. The financial aid office at your school
should be able to tell you the name, address and telephone number of
your lender and can also provide you with help and advice about
repayment problems. You can also talk to the Default Resolution Group at
the US Department of Education by calling 1-800-621-3115.
Collection Agencies
If you default on your student loans, the lender or guarantor may use
a collection agency to collect the loan. The collection agency's costs
are added to the amount due, and the borrower is required to repay them
in addition to the amount due on the loan.
Federal regulations state that a borrower who has defaulted on his or
her student loans may be required to pay reasonable collection costs in
addition to other charges, such as late payment fees. What constitutes
reasonable is not very well defined.
For loans held by the US Department of Education (e.g., Federal
Direct Stafford Loans), the department assesses collection costs at a
rate of 25%.
When consolidating a defaulted loan, collection costs of up to 18.5%
of the outstanding principal and interest may be included in the amount
consolidated. So a collection agency might be willing to reduce its fees
to 18.5% if the student consolidates his or her loans. But the
collection agency is under no obligation to do so. So if the student
consolidates his or her loans and the collection agency does not reduce
its fees, the student must pay the amount in excess of 18.5%.
If you work out a payment schedule within 60 days of default, some
collection agencies will waive or reduce the collection fee. Overall, it
appears that collection costs can legally be as high as 40%, perhaps
even higher.
|
