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Tuesday, September 6, 2011

What Happens When you default on a student loan? Some of the Consequences of Student Loan Default

A student loan borrower goes into default once he or she has failed to make a payment for 9 months or more on government backed education loans. For private student loans, the default goes into effect after missing one payment. At the point of default, the entire loan balance will come due. Federally guaranteed student loans are backed by the federal government, so that the federal government will pay back most of the loan balance to the lender. The lending institution will report the defaulted student loan to the U.S. Department of Education in order to make a claim for payment on the defaulted loan. However, this does not leave the borrower off the hook for student loan repayment. This is a brief list of the powers that the student loan collection agencies and the U.S. Department of Education may have to force repayment of the loan.

1. Collection agencies and fees The guarantor will hire a collection agency to work on its behalf to collect the amount due on the student loan. In most cases, additional collection costs, fees, and interest will be tacked onto the principle balance of the loan. This will result in a tremendous increase of the original amount borrowed on the loan, which will continue to grow and capitalize until paid off.

2. Tax return offset The United States Treasury department will very likely offset your federal tax returns, to pay towards the student loans. This will continue until you are out of default. If the debt owed exceeds the amount of the tax refund, then 100% of the borrower’s tax refund is taken. It will be applied towards the interest and fees on the outstanding student loan. If you are married and you and your spouse filed jointly on your taxes, then you can file an “injured spouse” form or IRS Form 8379, so that your spouse can get their half of the tax refund.

3. Administrative wage garnishment The U.S. Department of Education has the power to order employers to withhold up to 15% of disposable pay from a borrowers paycheck. The money withheld is then paid over to the guarantor or the Department of Education. The borrower will receive a Notice of Intent to Garnish from the Department of Education, prior to the wage garnishment.

4. Federal Benefits Offsets This means that the government can take a percentage of a defaulted borrower’s social security benefit, disability, and other federal benefit payments in order to offset the amount owed on a federally guaranteed student loan.

5. Lawsuit The borrower may be sued in court, resulting in additional costs and attorneys fees. If the entity that brought the lawsuit prevails, then it will be granted the authority to collect on the debt by wage garnishment, seizing funds from bank accounts, property lien, etc.

6. Revoke or suspend professional licenses The government has the right to suspend or revoke any professional license that a borrower possesses such as a license to practice law, medicine, nursing, etc. This measure seems unduly harsh, since a professional license may be the borrower’s livelihood, and further limits the ability to repay the debt. It may be that the lending institution or guarantor does not want a borrower to benefit from education, which was not paid for as agreed upon.

7. You are no longer eligible for deferrals or forbearance. The company that holds the student loan will not allow borrowers to obtain a hardship deferral or forbearance, once it has filed a claim with the U.S. Department of Education to get their money back. In addition, defaulted borrowers do not qualify for income-based repayment.

8. You will no longer be eligible for federal student aid programs. This means that you will not be able to get any federal grants, such as the Pell grant, Stafford loans, or Perkins loans for your education.

9. Defaults will be reported to the credit bureaus. Your credit score will pretty much go down the drain and it could impact your ability to get a good job and creditworthiness.

Some other things that you should know about student loans:

• There is no statute of limitations on student loan debt. Therefore, the collection agency and loan guarantor has the right and obligation to pursue the borrower for repayment until the death of the borrower (sometimes beyond death).

• Once a student loan is consolidated, most of the time, the borrower is not able to refinance the loan at a better interest rate.

• In most cases, student loans are not dischargeable in bankruptcy. There are exceptions to every rule, though. A small amount of people have been able to successfully discharge student loan debt due to “permanent and total disability” or “undue hardship”, but these are extremely difficult conditions to prove in bankruptcy court.

The bottom line is that ignoring your student loan debt could cost you dearly. Student loan debt is like no other debt in that they lack consumer protections and there is little legal recourse for borrowers that are unable to pay. There are ways to avoid default. Don’t become a bad statistic. Don’t let your student loans go into default, ever.

Related Posts:

Words of Caution For Anyone Thinking About Going to College

Thinking About Taking out Student Loans For College? Think Again.

Is Going to College a Good Idea in a Bad Economy?

Copyright 2011- www.thewhimsicalmusingsofsusan.com



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