As the graduating class of 2005 rolls into the working world, exams and term papers behind them, there is one thing that simply won’t go away despite their best efforts to forget: student loan debt. Unlike all other unsecured debt-debt without collateral for security-student loans cannot be discharged by claiming bankruptcy; rather, student loans remain legally enforceable until paid in full.
Depending on the type of student loan, borrowers are summoned to enter repayment either 90 or 120 days after separating from school, or after dropping below half-time enrollment. If these summons are ignored and loans remain delinquent for 270 days or become 270 days past due at any time, the loans enter “default” status.
What is Student Loan Default?
During the delinquency period, lenders of student loans authorized under Title IV of the Higher Education Act will exhaust all efforts to locate and contact the borrower before placing the loan in default. If the lender’s efforts are unsuccessful and the loan is placed in default, the loan will then be turned over to either the state guaranty agency or the Department of Education. Once a borrower’s loan enters default, the maturity date is accelerated making payment in full due immediately.
Guaranty Agency Collection Procedures
The steady decrease and current all-time low of student loan default rates suggests that guaranty agencies’ stringent collection procedures have successfully deterred student loan neglect. Although the Department of Education’s collections department is committed to assisting those in default and making repayment as simple as possible, borrowers’ non-response will result in one or more of the following collection methods:
Administrative Wage Garnishment: Under the Higher Education Act of 1965, the Department of Education and state guaranty agencies may require employers who employ individuals having defaulted on their student loans to deduct 10-15 percent of the borrower’s disposable income per pay period. Wage garnishment is a resort taken only when a borrower refuses to voluntarily repay his/her defaulted loans and may persist until the balance of the outstanding debt is repaid.
Treasury Offset Payments: The Department of Education may request the Treasury Department to conduct a federal offset against federal income tax refunds as a method of collecting defaulted student loan debt. In other words, borrowers with loans in default may forgo any federal tax refunds until their defaulted loan is repaid.
Legal Action: The Department of Education and state guaranty agencies may pursue defaulted student loan debt through litigation. If a borrower refuses to repay defaulted student loan debt voluntarily, he/she is subject to prosecution in a state or federal district court. In such cases, the borrower is sued for the outstanding balance as well as attorney’s fees and court costs. Again, these methods are used only as last resorts and require prior notice of the proposed offset.
Consequences of Student Loan Default
Aside from the above-mentioned consequences of student loan default, other less-obvious consequences are oftentimes omitted from consideration. For instance, federal student loan borrowers possessing loans in default status are no longer entitled to any deferments or forbearances.
Moreover, borrowers are ineligible to receive additional Title IV federal student aid until they have made payments of an approved amount for a minimum of six, consecutive months. Subsequently, loan default, in some cases, may force an individual to take a semester off due to his/her inability to qualify for federal student aid and afford the cost of higher education independently.
Also, in some cases borrowers who defaulted on their federal student loans can lose their professional licenses. For instance, lawyers who default on their loans may be subject to have their license to practice law disavowed. Doctors and CPAs would also fall into this category.
Finally, consistent with the Higher Education Act and the terms of most borrowers’ promissory notes, borrowers who let their loans slip into default become liable for all fees associated with collecting the federally financed loan. As a result, borrowers will end up repaying their outstanding loan balance, plus up to 25 percent in contingent fees in order to satisfy the debt.
Just as the phrase suggests, loan rehabilitation is a program designed to rehabilitate defaulted loans and return such loans to a favorable status. Rehabilitation programs require 12 consecutive monthly payments of a predetermined agreeable amount.
Borrowers in default should contact their servicing agency to define a rehabilitation program that is reasonable to both parties. If a reasonable rehabilitation agreement cannot be reached with your lender(s), then you should contact the Federal Student Aid Ombudsman’s office, a neutral/independent party designed to resolve disputes, by calling 877-557-2575 or visiting www.ombudsman.ed.gov. For additional information on loan rehabilitation, borrowers should visit www.ed.gov or call 800-621-3115.
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