Student Loan Default

Student Loan Default- Don’t Let Your Student Loan Go Into Default

Letting your student loan go into default is one of the biggest, if not the biggest mistake you could ever make. Yet about 20% of borrowers who borrowed more than $15,000 defaulted on their student loans before 10 years, according to a 2006 study by the National Center for Educational Statistics.

The best advice one could give or receive regarding borrowing money to

finance higher education would be to avoid it if you can, and minimize it if you cannot. Try to find some way to obtain scholarships, join the military or get a government job, work as a TA for free room and board, or stay at home and go to a junior college or community college for the first two years. In other words do whatever is necessary to keep from having to take out student loans, or at least make the amount borrowed as low as possible if you do. Here are some other ideas: Cut College Costs

What Happens When A Student Loan Goes Into Default?

First, realize that student loan companies make more money on loans that default than they do on loans that are paid off normally. How is this possible? First of all, when a federally backed student loan goes into default, the company can make a claim to the government to be repaid almost all the money that was lent, including both principle and interest accrued. Then a collection agency, which is likely owned by the original loan company, starts collection proceedings. If you have ever been harassed by a collection agency you know how uncomfortable this can be. And collectors for student loans know they have absolute leverage over you. They know you cannot discharge the loan if you declare bankruptcy, and they know you cannot refinance the loan for a better interest rate in the likely event you have already consolidated your student loans. They know they can have your wages garnished, as well as any money due to you from tax returns, disability payments, and Social Security earnings. That’s what is meant by absolute leverage. And if you have a professional license, most states will cancel it if you have a defaulted student loan, so after that you wouldn’t be able to work at the job you went to school to prepare for in the first place. And you will also lose other protections provided by government loans, like the right to deferment or forbearance. For the pleasure of all this, you get to pay a collection fee of about 25% of the amount of the loan as well.

Now You Owe 3 to 4 Times the Amount of the Original Loan

In addition to exorbitant fees for collection, there are also other high fees and penalties. Before you realize it, with accrued interest included, it is not unusual for people to get a bill for immediate payment of 3 or 4 times the original loan amount. In other words if you left school with the average loan amount for undergrads of about $20,000 (for students with graduate degrees the average is $42,000) you might find that you owe $60,000 or $80,000 or more because of all these fees and accrued interest.

What to Do

The best thing to do is obviously make all your student loan payments on time. If you find yourself in a position where this becomes impossible, you can possibly get a deferment or forbearance on federally backed loans to delay payments. If you have not consolidated your student debt you can do so using a payback plan based on income which will give you the lowest possible monthly payments. You should realize that to go into default on a student loan you must miss 9 consecutive payments (270 days). So the thing to do is pay something in that period of time. You’ll still be accruing interest and have lots of penalties so your loan amount due will continue to rise. But even that is better than default.

It has been reported that 10 million students and former students in the U.S. are overwhelmed by student debt (see the book “The Student Loan Scam” by Alan Collinge). It is therefore not surprising to learn that there are piles of horror stories about people who cannot escape this burden. I refer you to StudentLoanJustice.org and the book mentioned just above for more details. Some people have been so distraught they have left the U.S., and in a few cases people have actually committed suicide. There are grassroots movements to influence the U.S. Congress to change some of these predatory laws which allow these abuses, and some day change may come. Until then the powerful lobbying forces of the U.S student loan industry will be using all their considerable influence to resist change. If you are one of the 70% of U.S. college students with student loans, you should be aware of what can possibly happen to you and avoid student loan default at any cost.