Student Loan Repayment Pitfalls
The student loans just like the other forms of financial aid are a service that is subject for repayment.
However, although aware of such fact, many borrowers still fall to the trap of walking away from student loan
debt which then results to series of consequences.
They tend to ignore their being summoned to enter repayment usually either 90 or 120 days after separating from
school or after dropping below half-time enrollment. With this, the loans remain delinquent for 270 days or become
270 days past due at any time, leading the loans to “default” status.
Student Loan Default, Defined
Defaulted student loans are actually defaults made by the borrower to the creditor of the terms and conditions
of the student loan contract. It is usually caused by the act of escaping from debts, leading to unfavorable
consequences on the part of the borrower.
Basically, prior to the declaration of student loan default is the delinquency period. At this
period, the lenders of student loans authorized under Title IV of the Higher Education Act will exhaust all efforts
to find and contact the borrower.
If the lender’s efforts of locating the debtor are unsuccessful, the loan will then be placed in default. It
will be turned over to either the state guaranty agency or the Department of Education. And, once the loan enters
the default status, the maturity date is accelerated, making the overall payment in full due right away.
The Consequences of Student Loan Default
When the loan enters the default status, several consequences are connected to it. Some of them are mentioned
below: · The loans may be turned over to a collection agency.
- The borrower will be liable for all the costs associated with collecting the loan. This may even include
the court costs as well as attorney fees.
- The borrower can be sued for the entire amount of the loan.
- The wages may be garnished.
- The federal and state income tax refunds may be intercepted.
- That federal government may withhold part of the Social Security benefit payments.
- On the credit record, the defaulted loans will be mentioned, making it difficult for the borrower to get an
auto loan, mortgage and even credit cards. Note that having a bad credit record can harm your ability to find a
- The borrower’s chance to receive federal financial aid will now be impossible to happen until he repays the
loan in full or make arrangements to repay what he already owe and make at least six consecutive, on time,
- Federal interest benefits will be denied.
Aside from the above mentioned consequences, there is also some other less-obvious consequences that are
oftentimes omitted from consideration. One of those could be the rule that the federal student loan borrowers
holding defaulted student loans are no longer entitled to any deferments or forbearances.
Subsequently, there are some instances when the loan default may force the individual to consider or take a
semester off. This must be taken due to his or her inability to qualify for federal student aid as well as to
afford the cost of higher education independently.
What’s more, there is a great possibility for those borrowers who defaulted on their student loans to lose their
professional licenses. For instance, the lawyers who possess defaulted loans may be subject to have their license
to practice law disavowed. The doctors and certified public accountants would also fall into this category.
Lastly, the borrowers who just ignored summons for loan repayments will become liable for all fees associated
with collecting the federally financed loan. This means that the borrowers will end up repaying their outstanding
debt, plus up to 25 percent in contingent fees in order to satisfy the student loan debt. Note that this rule is
actually consistent with the Higher Education Act as well as on the terms of most borrowers’ promissory notes.
The Collection Procedures Involved with Defaulted Student
Most of the guaranty agencies’ stringent collection procedures have successfully deterred student loan neglect.
One of the supports for this claim is the steady decrease and current all-time low of student loan default rates.
However, although the collections department is highly committed to assisting those who are in default and making
repayment as simple as possible, the non-response in the borrowers’ side still opens up to one or more of the
following collection approaches:
- Garnishment of Administrative Wage: Under the Higher Education Act of 1965, the Department
of Education as well as the state guaranty agencies may require employers who employ individuals with defaulted
student loans to take away 10 to 15 percent of the debtor’s disposable income per pay period. The garnishment
of the administrative wage is actually a resort taken only when the debtor refuses to voluntarily repay his or
her defaulted debts and may persist until the total balance of the outstanding debt is paid back.
- Treasury Offset Payments: Aside from administrative wage garnishment, the Department of
Education has the right to request the Treasury Department to perform a federal offset against the federal
income tax refunds as a way of collecting defaulted student loan debt. To simply put, the borrowers with loans
in default status may forgo any federal tax refunds until he or she has repaid the defaulted loan.
- Legal Action: Litigation can be pursued by the Department of Education as well as state
guaranty agencies as a means for collecting the defaulted loans. It means that if the debtor refuses to repay
the debt voluntarily, he or she is subject to prosecution in a state or federal district court. The borrower is
therefore sued for the outstanding debt as well as for the attorney and court fees. But, these methods are
usually considered as last resorts, thus need prior notice of the proposed offset.
- Preventing Default
There are several ways that you can make to prevent the onset of student loan default. It is just somehow
necessary for you to place your interest and efforts on preventing it.
Here are the possible ways that you can consider:
- Make sure that you understand your loan options as well as the related responsibilities prior to taking out
a student loan.
- Simply make your payments on time.
- If possible, inform your lender or service provider promptly about any of the possible adjustments that may
affect the repayment of your student loan. In case you move or change your address, let them know. Also, make
sure that they know about the name changes, which are very possible because of marriage; graduation or
termination of studies; leaves of absence as well as transfers to another institution.
- If certain financial difficulties are encountered, try to consider applying for a deferment or forbearance
on your loans. Many experts often suggest that it is much better to defer your payments than to go in to
default status. Along with this, ask your lender or service provider about the available options while you are
still making payments, before you enter the default status of your loan. Always note that after you default,
you won’t be able to get a deferment or forbearance anymore.
- If for instance you are having trouble making your payments, try to contact your lender as they may be able
to suggest an alternate repayment options for you. Some of the possible options include graduated repayment,
income sensitive repayment, as well as income contingent repayment. Also note that the types of available
repayment options currently depend on whether the student loan was issued under the FFELP or FDSLP or Direct
student loan programs.
- A student loan consolidation can be considered as another way for preventing student loan default. Combine
all of your educational loans into one big loan as this gives you the chance to send your payments to just one
lender. What’s more, you may be able to extend the term of the loan in order to lessen the size of your monthly
- Simply keep records regarding your student loans. If possible, try to back up copies of all your letters,
canceled checks, promissory notes, disbursement notices, and some other necessary forms in a file folder. Just
Getting Out of Default
In case your loan already entered the default status, don’t worry. You still have hopes if you will just try to
pay even just a little consideration on your debts. The first move to take to get out of debt is simply to make
arrangements with your lender to repay the loan. It is commonly noted that once you have made six regular payments,
there is a chance for you to be eligible for an additional Title IV aid.
After you have completed twelve regular payments and applied for and received “rehabilitation”, you will no
longer be considered in default. It is also at this time when the record of the default will be eliminated from the
reports to credit reporting bureaus. And, for further information about the available repayment options that could
suit your needs, just contact your lender.
The financial aid office at your school should also be able to tell you the name, address as well as the contact
number of your lender. They can also give you supporting help and advice about your repayment problems.
Student Loan Rehabilitation
As the phrase suggests, the loan rehabilitation is a program designed to rehabilitate the defaulted student
loans and return such loans to a favorable status. This program actually requires 12 consecutive monthly payments
of a predetermined agreeable amount.
It is often suggested that those borrowers in default status must contact their servicing agency to define the
loan rehabilitation program that is reasonable to both parties. However, if a reasonable rehabilitation program
cannot be reached with your lender, there is the office of the Federal Student Aid Ombudsman, which is a neutral
party, designed to resolve any disputes.
Having said all these, the defaulted student loans are no doubt a serious problem that must be healed as soon as
possible. This is for the fact that when the case intensifies, certain damages not only on the person’s credit
rating, but other consequences as mentioned above will greatly result like a brush of fire.