Student Loan Default

Student loan is always a great asset for those of you aspiring for graduation form a reputed institution. However, in case you accumulate a lot of student loan debt you are responsible for repaying. You cannot escape the loan even if you ignore your monthly repayment bill, fail to graduate or cannot find a job after graduation. Moreover, you are not allowed to discharge the students’ loan through bankruptcy and ultimately run into default.

The simple and explicit inference of student loan default is not making payment of student loans for 270 days for loan repayable in monthly payments and 335 days in case of loan repayable in less recurrent payments, without arranging for deferment or forbearance. Normally, there is a six months grace period after graduation, beyond which your default-days commence. As soon as the criterion for student loan is met, the lender ensures necessary action to be taken.

For a student loan defaulter the lender exercises “due diligence” which implies that they make a serious attempt to get in touch with the defaulter and discuss on ways for repayment of the debt. If these efforts culminate in vain, next the lender would place your student loan in default with your state’s guaranty agency.

Procedure of recovery

The lenders would establish contact with you and warn through creditor phone calls and notices. You would receive at least four phone calls and four notices before finally sending a demand letter (normally sent after five months of non-payment). The final letter would stress on immediate repayment and then a default claim on your loan will be filed.

Once decided that the student loan is to be in default, the terms of the loan may be expedited and the total balance becomes due and payable along with the principal and interest, in that occasion. Your defaulted student loan is then sent to the state’s guaranty agency or The Department of Education, to be collected there.

The Department of Education can apply effective tools against the students who fail to repay their loans. The loan guaranty agencies can charge you quite high collection fees. Further, the collection agencies charge the Department of Education a commission, so you may have to repay the loan as well as the collection fee and the commission

There is a possibility that your student loan default be added to your Federal Income Tax. The refunds, which are due to jointly filing couples, can be subjected to withholding for repayment of the defaulted loan. If a spouse is not involved in the default, you can recover their portion by filing a claim for injured spouse with the Internal Revenue Service. Even your social security benefits, may be liable for withholding up to fifteen percent of the gross amount payable.

Consequences of student loan default

Now, there are several options for guarantor at disposition for collecting your student loan payments:

  • A professional collection agency can turn your loan over the top, the fees and penalties may go up to 25% of the total principal and interest due.
  • The treasury offset can garnish your federal and state income tax refunds
  • The loan you have defaulted may stay on your credit report for a minimum of 7 years.
  • Through wage garnishment your paycheck may garnish up to 15% of your disposable income.
  • You can be sued through legal action for the balance of the loan plus court costs and lawyers fees

Some of the other consequences you would have to face for student loan default are:

On defaulting you would have to pay the full loan.
A portion of your salary would be withheld in case you work for the federal government.
You would not be allowed to renew a professional license.
You will not be eligible for additional state or federal student aid until you make satisfactory arrangements for repayment.

In order to evade these punishing steps towards collection by the lender, try to examine a Federal Loan Consolidation Program. This would not only reduce your payment, it would perhaps extend them over a substantial period, even up to 30 years. It is important to realize that student loan default puts your prospective financial future at stake.