Student Loan Debt Collection: What Happens When You Default
The afterglow of finally earning your college degree wears off pretty fast once the payments on your student loans begin
. You tried to do everything right - you worked hard to get the grades you needed; you sacrificed here and there to stay in school; you worked part-time but still couldn't afford the rising costs of college. So you were forced to apply for a student loan and the money made life a little easier while you cracked the books. But most loan repayment plans begin six months after graduation, which in this stalled economy doesn't give the average graduate much time to look for a decent paying job. And all too often, default student loans end up at a debt collection agency or on the desk of a collection attorney.
The U.S. Department of Education has exceptional powers to collect on defaulted student loans. They can intercept your tax refunds, deny a student any new loans or grants, garnish your wages without an order from a court, take a percentage of Social Security benefits, and add on huge debt collection fees.
As if these powers to collect on defaulted student loans weren't enough, it is very difficult to dispute a student loan or have student loans discharged in bankruptcy court. The courts use different means tests to measure whether payment of the student loans would impose an undue hardship on the borrower and his or her dependents.
If all of these debt collection measures to force repayment of student loans don't make you want to go back to school (loan repayment stops if you are enrolled as a student), then it will also interest you to know that debt collection on student loans has no statute of limitations. You can be tracked down until you pay off your loan or die, whichever comes first.
If your student loan(s) were authorized under Section 435(i) Title IV of the Higher Education Act and you were supposed to repay in monthly installments, then a loan default is called after 270 days of non-payment.
If your loan is assigned to a guaranty agency or to the U.S. Department of Education for collection, you can expect one or more of the following to happen:
* If you are expecting a tax refund, the Department of the Treasury may send you a notice stating that they have offset your refund(s) on your federal and/or state tax return(s) as authorized by law.
* If your student loan is assigned to a private collection agency, you may be billed for the extra costs of collection.
* Your wages may be subject to garnishment where the U.S. Department of Education mandates that your employer turn over 15% of what the Department considers your "disposable" income to repay your loan. They don't need a court judgment to do this.
* The U.S. Education Department may file a lawsuit against you to compel you to pay back the amount you borrowed plus interest and fees.
* Your default student loan will probably be reported to the three major credit bureaus and your credit rating will drop.
If you default on your school loan, you will not qualify for any deferment or forbearance to get out of default. You are also not eligible to receive any more Title IV student aid until you have made timely payments of a pre-approved amount for six months in a row.
If you have an outstanding student loan, do everything possible to keep your payments current. If you lose your job or enter a period of financial hardship, look over your paperwork and find the correct number to call, and let someone know right away. You may be eligible for a temporary forbearance or deferment.
If you're already in default, call your lender anyway. You may be eligible for a loan consolidation or loan rehabilitation program. The worst thing you can do is nothing.
by: Sergei Lemberg
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