Common Pitfalls for Student Loan Defaults

Just like any other kind of financial aid a student loan is a service that you are required to repay at a later date. However, even though this is common knowledge a lot of borrowers still fall into a financial trap and walk away from the loan, bringing very bad consequences to their financial future. A lot of students neglect to start their repayment, which usually happens between 90 to 120 days after leaving school or not attending at least half time. When this happens and a student loan is delinquent for over 270 days it is considered a default.

In its most basic definition defaulted student loans are loans where the borrower has failed to meet their obligations to the creditor. Prior to a student loan is declared defaulted there is a period of delinquency. At this point the lender is authorized by Title IV of the Higher Education Act to exhaust all of their avenues for locating and contacting the borrower. If the lender cannot contact the borrower then the loan can be placed into default. Once it is in default the loan will be turned over to the state guaranty agency or the Department of Education. Once that happens the entire loan will be due in full immediately. But there are student loan forgiveness programs available.

Having a student loan fall into default has serious consequences for the borrower. The loan can be sold to a collection agency to pursue. The borrower could be responsible for not only the cost of the loan, but and fees or court costs associated with collecting the loan. In addition the borrower could be sued or their wages garnished to pay the loan. If the borrower gets a federal or state tax refund that can be confiscated for the student loan as well. On the borrower’s credit report the defaulted loans will be listed and make it difficult to get any kind of credit later. And if the borrowers needs to get federal student aid at a later date that will be impossible until the defaulted student loans are paid in full.

Once a student loan has been turned over to a guaranty agency, there are stringent collection procedures that they follow to collect on the loan. Because of these strict procedures there has been a gradual declines of in student loan defaults and is currently at an all-time low. If they cannot get a response from the borrower they have a variety of avenues to follow. The state guaranty agency or Department of Education can both direct companies who employ individuals with defaulted student loans to garnish their employee’s wages to pay it back. Usually this is only done if the borrower will not voluntarily repay the debt.

Apart from garnishing wages the Department of Education can also ensure that any tax returns due to the debtor are confiscated to repay the defaulted loans. As a last resort to collect the money for the defaulted student loans can pursue litigation and sue the debtor for the entire amount of the loans.

The best thing to do if for you to prevent your student loans from ever falling into default to begin with. First, you should make sure that you understand your responsibilities for repaying the loan prior to applying for one. Make sure that you can make all your payments on time. If you need an adjustment to your loan or any of your personal information changes (like your address) let the lender know immediately so arrangements can be made.

If you encounter a financial difficulty that means you will have a hard time repaying your loan for an extended period of time then you should try to defer your payments. Many financial experts agree this is a better option than allowing your student loans to achieve default status. Ask your lender for assistance if you need it since after your student loan enters default status you will not get assistance any longer.

Another option to help with your financial troubles is a student loan consolidation. This will combine all of your student loans into one larger loan so that you only have to may one payment a month. You could also try to make the repayment period longer so that your monthly payment will be smaller. No matter what you try to avoid default, keep a record of everything regarding your student loans. Keep copies of your letters, canceled checks, disbursement notices, or promissory notes.

If you loan is already in default then you can still have hope to attempt to correct the situation. The first thing you should do is try to make payment arrangements with the lender. Even if you can only pay a little right now, it is better than nothing and shows the lender some good faith. Once you have completed at least 6 you may be eligible for aid like payment deferment again. Once you have made 12 months of payments your loan will no longer be in default. This is also when the default will be removed from your credit report.

For any information regarding your available repayments options, call your lender and ask. If you don’t know how to do that ask the financial aid office at your school for their contact information.

If necessary you can enter a student loan rehabilitation program. This means that you have completed repayments for a specified amount for at least 12 months. The lender then considers the loan rehabilitated and is returned to good standing. If you and your lender cannot reach an agreement on a loan rehabilitation then reach our to the Federal Student Aid Ombudsman. They are a neutral party that handles these kinds of disputes.

Defaulted student loans are a very serious problem that must be remedied as quickly as possible. The consequences only get worse over time and will be harder to repair the longer the loan remains in default.