Why defaulting on student loans is a bad idea

What Does it Mean to Default on a Loan? What Happens When You Default?

Why defaulting on student loans is a bad idea

Defaulting on a loan happens when repayments aren't made for a certain period of time. When a loan defaults, it is sent to a debt collection agency whose job is to contact the borrower and receive the unpaid funds.

Defaulting will drastically reduce your credit score, impact your ability to receive future credit, and can lead to the seizure of personal property.

If you can't make payments on time, it's important to contact your lender or loan servicer to discuss restructuring your loan terms.

Loan Default Explained

Loan default occurs when a borrower fails to pay back a debt according to the initial arrangement. In the case of most consumer loans, this means that successive payments have been missed over the course of weeks or months.

Fortunately, lenders and loan servicers usually allow a grace period before penalizing the borrower after missing one payment. The period between missing a loan payment and having the loan default is known as delinquency.

The delinquency period gives the debtor time to avoid default by contacting their loan servicer or making up missed payments.

Student Loan270 days90 days to make a payment
Mortgage30 days15 days to make a payment
Credit Card180 days1 missed payment allowed before penalty
Auto Loan1 to 30 daysVaries widely

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The consequences of defaulting on a loan of any type are severe and should be avoided at all costs.

If you miss a payment or your loan is in delinquency for a few months, the best thing to do is to contact the company who manages your loan.

Often times, loan servicers will work with debtors to create a payment plan that works for both parties. Otherwise, leaving a loan in delinquency and allowing it to default can, in the worst cases, lead to seizure of assets or wages.

How Loan Default Works

Defaulting on a loan will cause a substantial and lasting drop in the debtor's credit score, as well as extremely high interest rates on any future loan. For loans secured with collateral, defaulting will ly result in the pledged asset being seized by the bank.

The most popular types of consumer loans that are backed by collateral are mortgages, auto loans and secured personal loans. For unsecured debts credit cards and student loans, the consequences of default vary in severity according to the type of loan.

In the most extreme cases, debt collection agencies can garnish wages to pay back the outstanding debt.

Student LoanWage garnishment
MortgageHome foreclosure
Credit CardPossible lawsuit and wage garnishment
Auto LoanCar repossession
Secured Personal or Business LoanAsset seizure
Unsecured Personal or Business LoanLawsuit and revenue or wage garnishment

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Student Loans

For federal student loans, the first consequence of default is that “acceleration” kicks in, meaning that the entire loan balance is due immediately.

If this balance doesn't get paid off, the government can then withhold tax refunds or any federal benefits that the borrower receives.

Debt collectors can also sue borrowers to win the right to seize their wages—and after such a trial, debtors are often charged with the collector's court fees.

As with other debt obligations, defaulting on a student loan will send a borrower's credit score plummeting, from which it can take years to recover.

Un other loans, student loan defaults stay on a borrower's record for life, even if bankruptcy is filed.

Additionally, borrowers who default become ineligible to take out any more federal student aid or to apply for loan deferment or forbearance, which can help struggling debtors.

The good news is that student loans have a long delinquency period before they default—270 days, or roughly nine months. This allows proactive borrowers to get their finances straight and avoiding defaulting altogether.

For borrowers with a delinquent loan, remember that it's most important to stay in contact with your loan servicer and communicate your financial situation to them, especially if you feel that you can't make your loan payments.

Credit Cards

While most credit card companies allow one late payment before penalizing card holders, missing multiple bills can ding a credit score by as much as 125 points.

Additionally, card companies can add a late fee of $35 to $40, as well as apply a penalty interest rate—which will make the cost of the outstanding debt much higher. Once a credit card debt defaults, it will trigger an aggressive debt collection process, during which borrowers are contacted frequently by collection agencies.

However, while it is possible for collectors to sue and win a wage garnishment, it's more ly that they'll be willing to negotiate a partial debt repayment.

The typical delinquency period before a credit card debt defaults is around 6 months.

While this period gives debtors a sufficient amount of time to straighten out their finances, it can also be a time when the debt, if left unpaid, rapidly accrues interest.

For debtors looking to avoid this situation, a good option is to take out a personal loan to consolidate your outstanding debt. These types of personal loans allow for fixed monthly payments and generally have lower interest rates than credit cards.

Mortgages

Mortgages are secured with the purchased home as collateral, meaning that the home can be seized if the loan isn't paid back according to the initial agreement. For most homeowners, this means that defaulting on a mortgage will lead to foreclosure.

While this is a drastic consequence, foreclosure can be avoided by figuring out how to refinance your mortgage to make it more affordable.

Eligible homeowners might consider the Home Affordable Refinance program, or HARP, which is designed to help underwater borrowers.

Above all, making your payments on time can help you avoid default. with other loans, it's important to communicate with your loan servicer if you think you can't make your mortgage payment. If you've made payments on time in the past and can prove your current financial distress, you may be able to negotiate for a restructured loan agreement.

Auto Loans

When an auto loan defaults, the lender or car dealer is usually able to seize or repossess the car to pay for the outstanding debt. However, repossession is a last resort move for most auto lenders.

Because the value of a car depreciates over time, it's ly that the current value of a repossessed car isn't enough to cover the outstanding balance of a defaulted loan.

Repossessed cars also have to be resold for the lender to get any cash—and as such, lenders prefer to get money directly from their borrower rather than seize collateral. So most of the time, they're willing to work with borrowers to restructure the terms of an auto loan.

Other Types of Loans

For personal loans and business loans, the consequences of default vary depending on whether the loan is secured or unsecured.

With business loans, defaulting can often times have a negative impact on the business owner's credit score if the loan was backed by a personal guarantee. Defaulting on a personal loan will also make it much harder to receive credit in the future.

However, as outlined in the sections above, these defaults can be avoided by proactively communicating with your lender to negotiate for a restructured loan.

  • For secured personal loans, default will usually result in the collateral asset being seized by the lender
  • For secured business loans, default will usually result in lenders seizing revenue or inventory
  • For unsecured personal loans, default will often result in wage garnishment
  • For unsecured business loans, lenders can litigate to receive a lien against a company's earnings

How to Get Loan Default

For student loans, there are specific programs loan consolidation and loan rehabilitation that are designed to get student loan debtors default. Rehabilitating a student loan allows borrowers to make a monthly payment that is equal to 15% of their monthly income. To qualify, borrowers must first make nine consecutive payments.

Loan consolidation, the other federal program, allows a borrower to get default by making three consecutive monthly payments at the full initial price, and afterwards enrolling into an income-driven repayment plan.

Because student loans are not wiped out by declaring bankruptcy, these programs exist as a way for lenders to recoup their losses.

For other types of loans, it's much harder to find specific programs or loans designed to help debtors get default. Your best bet is to negotiate a repayment plan with your debt collector if it's possible.

On the other hand, depending on the size of your defaulted loan and the severity of your debt, you may want to hire a bankruptcy lawyer to examine your financial situation.

If you're far too overwhelmed with outstanding debt obligations, it's ly that you could benefit from the loan forgiveness provided by declaring bankruptcy.

Sources

Источник: https://www.valuepenguin.com/loans/what-does-it-mean-to-default-on-a-loan

Student Loan Default: What It Is and How to Recover

Why defaulting on student loans is a bad idea

COVID-19 relief may affect information on this page. Know your options before making any decision.

Student loan default can feel overwhelming. But if you’ve defaulted, you’re not alone: Within three years of entering repayment, 9.7% of student loan borrowers default, according to the Education Department.

As part of the first coronavirus relief bill, the government stopped federal student loans from entering default and paused collection activities on those that already had. These protections are in place through Sept. 30, 2021.

During this break, you can get loans back in good standing with options loan rehabilitation and consolidation. Take action as soon as possible to avoid penalties garnished wages and seized tax refunds when collection activities resume.

What is student loan default?

Student loan default means you did not make payments as outlined in your loan’s contract, also known as its promissory note. Default timelines vary for different types of student loans.

  • Federal student loans. Most federal student loans enter default when payments are roughly nine months, or 270 days, past due. Federal Perkins loans can default immediately if you don’t make any scheduled payment by its due date.
  • Private student loans. The Consumer Financial Protection Bureau states that private student loans often default after three missed payments, or 120 days total, but check your loan’s promissory note to know the specific timing. Some private loans default after one missed payment.

What happens before default?

Before federal student loans default, they enter a status known as delinquency. Loans are considered delinquent as soon as you miss a payment, although your servicer won’t report these late payments to credit bureaus until 90 days have passed.

Delinquent federal student loans are eligible for postponements and repayment plans that could make payments more affordable, such as income-driven repayment, deferment and forbearance. You cannot use these options once loans default, so contact your servicer immediately if you fall behind on your payments.

Many private lenders will help you catch up on payments by temporarily lowering your monthly payment or allowing you to pause repayment with a deferment or forbearance.

» MORE: Deferment or forbearance: Which is right for you?

Are your student loans in default?

If you aren’t sure if your student loans are in default, the easiest way to find out is to check with your servicer. If you aren’t sure who that is — or aren’t ready to have a conversation with them about your loans — you have a couple of other options.

  • Log in to studentaid.gov. All federal student loan borrowers have a My Federal Student Aid account they can access with their FSA ID. Sign in to your account, select a loan and look at its repayment status to see if it’s listed as in default. Your account also includes information about your servicer, if you need it.
  • Pull your credit report. Your credit report will list federal and private student loan defaults under the negative information section. You can get a copy of your report for free once a year at annualcreditreport.com.

These resources may not be updated in real-time, so your loan could be in default and not show up as such. Confirming your loan’s status with your servicer is your best bet.

Responding to debt collectors

Receiving calls from a debt collector is another sign of student loan default.

Federal student loan holders can place defaulted student loans with a collection agency if you do not make payment arrangements with them. Private student loans are typically considered “charged off,” or uncollectible, after 120 days of missed payments and can be sold to a collection agency

What happens if you default on student loans?

A student loan default can affect you in many ways. Penalties of default include the following.

Your loan holder can take other money from you

To collect on federal student loans, your loan holder can garnish your wages and withhold your tax refunds and other government payments, Social Security checks.

Private student loan holders can’t take your tax refunds or Social Security payments, but they can take you to court. If they receive a judgment in their favor, they can garnish money from your paychecks or even your bank accounts to pay your defaulted loan.

Your credit score is damaged

A student loan default and the late payments that preceded it can remain on your credit report for seven years. This negative mark can make borrowing for a car, home or additional schooling more expensive — or potentially impossible. Default can also hurt your ability to rent an apartment, sign up for a new cell phone plan or even get a job.

Late fees and interest will continue to build on your debt, increasing the amount you owe. You can also be charged costs for the collection of your defaulted loan. These collection costs may be as much as 25% of your loan's balance.

For example, let’s say you owe $30,000 at the time of default. You could have to pay as much as $7,500 in collection costs on top of that $30,000 balance to pay off your loan.

Your education can be affected

If you have a student loan default, you can’t take on additional student loans or receive other federal aid to return to school.

If you’ve already graduated, your school can choose to withhold your academic transcript until your debt is repaid.

Your professional license can be suspended

License suspension laws and enforcement vary greatly from state to state. But if you work in a field medicine or teaching, your state may suspend or revoke your professional license if your student loans default. This can happen with your driver’s license as well.

One penalty you don’t have to worry about is being arrested or imprisoned for not paying a student loan. However, your lender can sue you to repay your loans. In many states if your lender wins a court judgment against you, you can be arrested for not complying with the court’s order. Don’t ignore a court summons.

» MORE: Can’t pay parent PLUS loans? 4 ways to get back on track

How to get student loans default

The Education Department offers three clear ways to recover from federal student loan default: repayment, consolidation and rehabilitation. Each can prevent or halt the consequences of default if you act fast enough; the best one for you will ly depend on your priorities.

If you want to get debt entirely

When student loans default, the full amount owed becomes due immediately. If you can afford that, you can pay off your loans and be done with your debt. Of course, that won’t be possible for most borrowers. You may be able to negotiate a student loan settlement for less than you owe, but don’t expect big savings.

Don’t take on a personal loan to pay your student loans — even if they’re in default. Personal loans typically carry higher interest rates than student loans. Explore other remedies that won’t put you in more debt.

If you want to help your credit

Student loan rehabilitation is the best option in most cases because it’s the only one that removes the default from your credit report, though previously reported late payments will remain.

To rehabilitate your loans, you must make nine monthly loan payments within 10 consecutive months. Your monthly payments will be 15% of your discretionary income, or you may request a lower amount.

You can only rehabilitate a student loan once. If you choose this option, make sure you can afford your payments once you complete the process, ly by enrolling in an income-driven repayment plan.

If you want to resolve the default quickly or already rehabilitated the loan

Besides paying in full, student loan consolidation is the fastest route to exit default. You can do either of the following to qualify:

  • Make three full, on-time, consecutive monthly payments on the defaulted loan.
  • Agree to repay your new loan under an income-driven repayment plan.

Consolidation may make sense if you have to resolve the default quickly, for instance if you’re returning to school and need access to financial aid. Consolidation will not remove the default line from your credit report.

Recovering from private student loan default

Private student loans don’t come with standard recovery options federal loans.

Ask your lender about possibilities for getting default. It may have options similar to federal loan default programs, or you may be able to negotiate another resolution to repay or agree to a student loan settlement for less than you owe.

If you can’t work something out with your lender, consider contacting a lawyer who specializes in student loans. The private student loan market is especially complicated, so having someone who understands the system, your rights and your options is crucial.

» MORE: Is there a statute of limitations on student loans?

Источник: https://www.nerdwallet.com/article/loans/student-loans/student-loan-default

Is It Ever A Good Idea To Default On Student Loans?

Why defaulting on student loans is a bad idea

No one ever really plans to default on their student loans. For some people, student loan relief options refinancing, consolidation, deferment, and forbearance only go so far.

According to the Wall Street Journal, more than 40 percent of federal borrowers aren’t making student loan payments and about 1 in 6 borrowers are in default.

If you feel you’ve tried everything and still can’t afford to make payments on the tens or even hundreds of thousands of dollars that you owe, your student loan debt can become an even bigger burden.

What happens when you default on your loans?

Defaulting on your loans means you failed to repay your debt as agreed according to your promissory note. Student loan default is described differently depending on whether your loans are private or federal.

With federal student loans, as soon as you miss a payment, your account becomes delinquent. Once you haven’t paid for 90 days, your delinquent status is sent to all three major credit bureaus. Once your payment has become 270 days past due, your account will be sent to collections and your student loans will be considered in default.

Some private lenders consider your loans to be in default after only one missed payment or 120 days of non-payment.

Consequences of going into default

Defaulting on your student loans comes with quite a few damaging consequences. For starters, that fact that you didn’t honor the repayment terms you agreed to with your lender(s) can have a serious negative impact on your credit.

If you have federal student loans, you’ll be ineligible for any federal student loan relief programs student loan forgiveness.

In addition, you will have to deal with extra fees from the collection agency and possibly even legal fees if your lender takes legal action.

The government can also garnish your wages and take up to 15 percent of your paycheck (up to 25 percent if you have two different lenders) or the IRS can have your tax refund withheld.

Defaulting on private loans

It’s clear that federal student loan borrowers have more relief options to accommodate them if they can’t afford to make student loan payments. If you have federal loans, you can apply for deferment or forbearance if you are facing an economic hardship or apply for a pay as you earn payment plan that is your current income.

With private loans, you don’t have those benefits which can leave you in a tough position. On one hand, you can try to keep up with payments or negotiate with your lender and on the other hand, you could consider to stop paying on your student loans.

Not paying your student loans will result in them going into default and can pose some serious problems for you including legal and credit issues.

For private loans, there is a statute of limitations where the creditor must decide to sue you or lose the ability to force payment from you.

Some people Steve Rhode, a Huffington Post contributor, argue that there are some situations when you should halt all efforts to pay back your student loan.

In this article, he is mainly speaking to private student loan borrowers who don’t have many options and he offers up several solid reasons why borrowers might want to stop paying on their unaffordable student loans.

With that being said, this decision should be approached with extreme caution and considered as an absolute last resort.

Discharging student loans in bankruptcy is possible—but exceptionally difficult

Declaring bankruptcy is not an easy decision to make. While you will receive some relief from your overwhelming debt burden, you’ll also have to deal with the damages.

A Chapter 7 bankruptcy stays on your credit report for 10 years while a Chapter 13 sticks around for seven years. The amount of debt that you manage to get discharged could impact how much your credit score drops. If you are planning on applying for a mortgage sometime in the future, a bankruptcy can set you back by several years.

It’s usually very difficult to discharge your student loans during bankruptcy, but it’s not impossible. You’ll need to file for either Chapter seven or Chapter 13 bankruptcy. You’ll also have to hire a law firm and prove undue hardship—meaning that you are unable to repay your student loans due to a medical condition, low income, or another form of economic hardship.

If you are unable to work for medical reasons, you may have a chance of getting your student loans discharged in bankruptcy.

A few years ago, Jason Luliano from Yale University’s law school program conducted a studentloan bankruptcy study and found that judges grant a hardship discharge to nearly 40 percent of the debtors who file for bankruptcy and seek one.

His nationwide study also found that only 0.1 percent of student loan debtors who have filed for bankruptcy attempt to discharge their student loans.

While it’s not a guarantee, the possibility to discharge your student loans during bankruptcy is an option but you must meet the requirements of having a situation that demonstrates extreme economic hardship, among other factors.

If you don’t receive a full discharge in bankruptcy, a portion of your student loans could still be discharged.

Default should remain a last resort—try these alternatives first

Allowing your student loans to go into default or trying to have them discharged in bankruptcy is a very risky move that you may not want to consider.

This is why it’s important to thoroughly weigh all your options and try an alternative method to ease your student loan burden.

If you feel you can’t afford to make your monthly payments on your private student loans, start by contacting your lender to see if you can negotiate a lower interest rate or a different payment plan.

Since your lender wants their money back and probably doesn’t want to deal with lawyers and lawsuits, they may be willing to work with you to avoid not getting any money back at all. You can also try refinancing your student loans with another lender in the hopes of getting a lower interest rate that could make your payments more affordable.

Other borrowers who are facing financial issues that are not extreme have opted to move in with family or pick up a second job in order to pay back their student loans. Those temporary changes could make a huge impact.

Summary

People have most certainly managed to get some of their student loans discharged in bankruptcy, but it’s not easy, and the tradeoffs are considerable. Better to consider other options, and to take action before your financial situation gets so dire that you cannot avoid default.

Read more:

Источник: https://www.moneyunder30.com/default-on-student-loans

Is Student Loan Debt Really Such a Bad Thing?

Why defaulting on student loans is a bad idea

Updated on December 11th, 2020

Student loans are one of the most popular ways for people to pay for college, especially young students looking to work their way to a career. Often, student loan debt is marketed as an excellent option, partially because the interest rates are lower than those associated with many other forms of credit and they are generally easy to obtain.

But even with the lower costs, it is important to remember that student loan debt is still debt that comes with interest payments. And it is something your child can be saddled with for a decade or longer.

Consequences of Student Loan Debt

As of June 30,2020, total student debt in the US stands at $1.67 trillion with over 44.7 million borrowers. The average graduate in the class of 2020 left college owing $37,584 in student loan debt, with some students owing much more. If you focus on specific career fields, this number can be much larger, the average student loan debt of a medical degree. 

With numbers that, it’s no surprise that at least some people will default on their loans. But, did you know that the student loan delinquency or default rate is actually 11.

2% and nearly That means more than one in 10 individuals with student loans have at fallen significantly behind, if not completely defaulted, on their student loan debt payments and one if every three is at least late when repaying their obligation.

Delaying Major Milestones

So, what do these debt loads mean for students your child? It often means they have to put off other important things in their lives and may need more help from mom and dad to keep afloat.

For example, 26 percent of Millennial college students expect to have to move back home after graduating to help make student loan debt payments manageable. And, the majority of students aged 20 to 26 don’t anticipate having their student loans repaid until they are at least 35.

Along with that, 31%of students expect to have to delay saving for retirement due to their debt obligations, and that could lead them to have to delay retirement if they can’t make up the missing funds. In fact, a recent survey suggests the retirement age for college graduates has been pushed back to 75 years old!

Further, 21% expect their student loan debt to delay when they get married and 25% wait to have children because of the burden.

What Student Loan Debt Looks

In most cases, students carrying an average federal student loan debt of $37,172 will have a mix of subsidized and unsubsidized loans. Currently, the interest rates for each loan type is 4.45% and 6% respectively.

If your child’s debt is evenly split between the two programs (which isn’t necessarily going to be the case), that creates and average interest rate of 5.225%.

So, for ease of math, we will use that interest rate for our calculations.

Using the student loan debt information above, and suggesting your child uses the standard 10-year repayment plan, that means their monthly payment will be $398.37. That’s nearly $400! And, to make matters worse, they’ll pay over $10,000 in interest!

Of course, other repayment plans are available to those who are eligible, but it is important to see exactly what their debt load means, especially when it comes to the amount of interest being paid over the life of the loan.

Credit Considerations

Student loan debt doesn’t just affect your child’s cash flow; it also affects their credit. While having a responsibly managed loan on their report can help them build their credit, which can be beneficial to young borrowers with a limited history, it can also have negative consequences for their scores and their ability to secure other credit products.

Missed Payments and Defaults

For example, a missed student loan payment can cause a good credit score to fall by up to 100 points, making it much harder to secure new forms of credit and leading to higher interest rates. Subsequently missed payments or defaults will only make scores fall further.

To make matters worse, the government can begin to garnish money from wages or taxes in the case of defaults, removing funds directly from your child’s paycheck and tax returns. Wage garnishments can total up to 15% of a person’s check, and tax garnishments can equal the entire refund.

Debt-to-Income Ratio

Student loan debt is also typically quite sizable, and that means their debt-to-income ratio will be significantly hurt by their student loans. This metric compares the amount of debt payments a person makes to the total amount earned in a specific period, such as total monthly debt repayment obligations to monthly income.

While this calculation doesn’t impact your child’s credit score, it is factored in when deciding whether a lender will extend them credit. And this could hurt their chances of doing things securing a mortgage if their ratio is too high.

Managing the Student Loan Question

In an ideal world, the best way to handle student loan debt is to avoid it entirely. But many people have to fund at least part of their education with student loans, so keeping that amount as low as possible can lower the associated repayment burden.

Grants and Scholarships

Often, the first step every student should take is to look for grants and scholarships that can provide money for college. Many grants are issued the student’s FAFSA information, so make sure your child completes theirs as soon as possible.

Scholarships are also an excellent way to offset the cost of tuition and other college expenses. These funds don’t have to be repaid by students who receive the awards, making them free money to put towards their education. And, many scholarships don’t have need-based criteria, so anyone can potentially score some money regardless of their (or their parent’s) income!

If you are interested in learning more about applying for scholarships, join our free webinar for parents.

Space is limited, so click HERE to sign up for the webinar today and find out more about helping your child score scholarships to keep student loan debt in check!

Keep Student Loan Debt Low

Sometimes, acquiring some student loan debt seems unavoidable. When that’s the case, it is important to work at keeping the amount as low as possible.

First, students shouldn’t borrow any more than is absolutely necessary for covering the cost of tuition and other mandatory expenses.

For example, did you know that your child can negotiate college tuition to help them lower their potential student loan debt? Learn more by reading this:

Related post: 5 Steps to Negotiate College Tuition and Save Thousands of Dollars

Second, work to keep all of your expenses as low as possible. This includes everything from books and school supplies, room and board, and other living expenses. If you are interested in learning all of the ways your child can save, read this:

Related post: 75 Easy Ways to Save Money in College

Working to keep student loan debt low means it will be easier to repay the amount borrowed, helping your child move forward with other milestones more quickly.

Pay Student Loan Debt Off Early

Another tip for managing student loan debt is to pay it off as fast as possible.

This can be done by making more than the minimum payment every month, directing extra funds from performance bonuses or second jobs to the cause, or even sending any tax refund money straight to the debt.

Making additional payments not only brings the principal down, but it also lowers the amount of interest that will be paid over the life of the student loan, creating a definite win-win situation for your child.

Under the right circumstances, it is possible to get a college education without adding any debt. But, if student loan debt is simply unavoidable, then paying it off quickly can save hundreds if not thousands of dollars in the end while also letting your student move on to other life goals with greater ease. 

Lastly, you may be able to pursue a career with student loan forgiveness, those who could benefit from the Public Service Loan Forgiveness program.

Источник: https://thescholarshipsystem.com/blog-for-students-families/student-loan-debt-really-bad-thing/

Student Loan Default Has Serious Financial Consequences

Why defaulting on student loans is a bad idea

As of December 2019, about 43 million Americans held federal student loans, and the education financing system is under growing pressure as more borrowers struggle to repay, a problem compounded by the complexity of the repayment process.1 The U.S.

Department of Education reports that about 20 percent of borrowers are in default—typically defined as having gone at least 270 days without a payment—and more than a million loans go into default each year.

2 And although recent research indicates that many borrowers eventually are able to get their loans current, some default again, even multiple times: twenty-five percent of people who restored their loans to good standing defaulted again within five years.3

Most federal student loans are managed by servicers—third-party companies under contract to the Department of Education—that perform functions such as collecting payments and helping borrowers select repayment plans and access tools for pausing payments. After a borrower defaults, the servicer transfers the loan to the Department of Education, which generally reassigns it to a private agency to collect the debt.

Failure to repay student loans can have serious financial consequences for borrowers, including collection fees; wage garnishment; money being withheld from income tax refunds, Social Security, and other federal payments; damage to credit scores; and even ineligibility for other aid programs, such as help with homeownership. These outcomes can also adversely affect a family’s financial security.

Borrowers who default face a range of harmful outcomes

When borrowers are in default, their loans continue to accrue interest.

Further, borrowers who had been enrolled in income-driven repayment plans—which tie monthly payments to borrowers’ incomes and family sizes, and offer loan forgiveness after 20 to 25 years of qualifying payments—lose access to these programs and their benefits while in default. And borrowers in default are ineligible for additional federal student aid.

The Department of Education and collection agencies can charge borrowers who default as much as 25 percent of principal and interest while interest continues to accrue.

And government agencies and debt collectors may also charge fees associated with wage garnishment and U.S.

Treasury Department withholdings, known as offsets, from borrowers’ Social Security, federal income tax refunds, or other federal payments (see Repayment, below, for more information).

Servicers are required to report loans that are in default or more than 90 days delinquent to the major national credit bureaus. These notations remain on borrowers’ credit reports for up to seven years.

Research suggests that, on average, student loan borrowers’ credit scores—many of which may already be low—decline by 50 to 90 points in the period leading up to a student loan default, potentially a result of delinquent payments and possibly indicating that borrowers who default on student loans are falling behind on other bills as well. And although these individuals’ credit scores can recover somewhat shortly after they enter default, borrowers with poor credit will pay more for or have difficulty obtaining credit cards, home or car loans, and other consumer credit and insurance products for several years.

Some borrowers who default–depending on their state of residence and loan type–are at risk of having their driver’s or professional licenses suspended, compromising their ability to continue working. Similarly, military service members, contractors, and federal employees with delinquent or defaulted debt can be denied security clearances, duty stations, and promotions.

Exiting default can be complicated and confusing

The options for getting default can present barriers for many borrowers.

Borrowers in default can return their loans to good standing through “rehabilitation,” in which they make nine on-time payments their incomes within 10 consecutive months.

Borrowers who cannot afford these payments may be able to make, at the discretion of the debt collector, lower alternative monthly “reasonable and affordable” payments that take expenses as well as income into account.

Rehabilitation can typically be used only once.

When loans are successfully rehabilitated, the defaults are resolved on the borrowers’ credit histories, although the delinquencies remain, and the loans transfer back from the debt collector to a servicer and regain eligibility for income-driven plans.

However, for some borrowers, the “reasonable and affordable” payment made while in rehabilitation might be less than the income-driven payment offered when they return to good standing, which could lead to confusion and potentially further delinquency.

This process allows borrowers to roll their existing federal student loans into a new loan, which they are then responsible for repaying.

To consolidate a defaulted loan, borrowers must either make three on-time monthly payments on the defaulted loan or enroll in an income-driven repayment plan.

Borrowers generally can consolidate loans only once, and the default remains on their credit histories.

Borrowers may either voluntarily repay all or a portion of their defaulted loans or be compelled to do so through a variety of mechanisms.

For instance, the Department of Education can direct the Department of the Treasury to withhold money from various federal payments, such as the borrower’s federal income tax refunds, including the refundable portion of tax credits, and Social Security to offset a defaulted student loan. Similarly—and sometimes simultaneously—the entity collecting a loan can garnish up to 15 percent of the borrower’s wages.

borrowers who consolidate or rehabilitate their loans, those who are subject to wage garnishment or federal offsets also may incur collection fees. Researchers have noted that differences in fees across collection methods can create confusion for borrowers and that collections can damage family financial security.

In some circumstances—including death; disability; school closure; or certain misconduct, misrepresentation, or deception on the part of a school—the government may also release the borrower from the obligation to repay a defaulted loan. Un most other types of debt, federal student loans can rarely be discharged in bankruptcy. 

The Department of Education and Congress can do more to help borrowers avoid default

Higher education is among the most effective strategies available to bolster families’ economic security. A focus on the significant challenges facing current borrowers and improvements to the student loan repayment system to help them avoid default are critical.

Pew research points to three actions that the Department of Education and Congress could take to boost repayment success among struggling borrowers:

  • Identify at-risk borrowers before they are in distress—in particular, by using risk indicators such as borrowers missing payments early, repeatedly suspending payments, and having previously defaulted.
  • Provide loan servicers with resources and comprehensive guidance on how to prioritize interactions and engagement with high-risk borrowers.
  • Continue to eliminate barriers to enrollment in affordable repayment plans to build upon the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act. The act authorizes data sharing between the Internal Revenue Service and the Department of Education to streamline burdensome and duplicative income verification requirements for enrolling in income-driven plans. If effectively implemented, the act is a step in the right direction, but policymakers can do more to restructure the student loan repayment system, such as simplifying the process for direct and targeted outreach to those borrowers most at risk for—or already facing problems with—delinquency and default.

These changes should be implemented in conjunction with clear and consistent repayment-management rules for servicers and other Department of Education contractors and with oversight mechanisms to ensure that those rules are successfully applied.

Endnotes

  1. Office of Federal Student Aid, “Federal Student Loan Portfolio,” U.S. Department of Education, accessed Feb. 24, 2020, https://studentaid.ed.gov/sa/about/data-center/student/portfolio. The total student loan holders figure includes direct and Perkins loans and loans from the Federal Family Education Loan (FFEL) program.
  2. Ibid.; Office of Federal Student Aid, “Default Rates,” U.S. Department of Education, accessed Feb. 24, 2020, https://studentaid.ed.gov/sa/about/data-center/student/default. The total borrowers in default figure includes direct and FFEL loans, and borrowers with both types of loans may be counted more than once. Although default technically occurs after 270 days of missed payments, these figures measure default after 360 days.
  3. Unless otherwise noted, all data in this fact sheet are cited in or from The Pew Charitable Trusts, “Student Loan System Presents Repayment Challenges” (2019), https://www.pewtrusts.org/en/research-and-analysis/reports/2019/11/student-loan-system-presents-repayment-challenges.

Источник: https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2020/04/student-loan-default-has-serious-financial-consequences

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