Student loan default
Encyclopedia
Defaulting on a student loan
in the United States can have a number of negative consequences. To understand loan default, it is helpful to have a few common terms defined:
Loan Deferment is a postponement of a loan's repayment. There are many reasons why someone might seek to defer a loan, including a return to school, economic hardship, or unemployment.
Loan Delinquency is a failure to make loan payments when they are due. Extended delinquency can result in loan default.
Loan Default is the failure to repay a loan according to the terms agreed to in the promissory note
. A lender may take legal action to get the money back.
There are other negative consequences resulting from a defaulted loan. A student who wishes to return to school cannot qualify for federal aid in the United States until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.
Individuals who are worried that they are unable to service their student loan debt should receive advice and counselling. There are numerous reliefs available. Student loan debt can be cleared through bankruptcy
, although special procedures must be followed.
To object, a written statement must be presented within 65 days of the IRS’ notice, and must give evidence of any of the following:
The government can also garnish wages as a way to recover money owed on a defaulted student loan. The United States Department of Education
or a Student Loan Guarantor
can garnish 15% of a defaulted borrower’s wages. The loan holder does not have to sue the borrower first. The borrower can object to the garnishment, but only under very specific circumstances, such as if his weekly income is less than 30 times the federal minimum wage.
Defaulting on student loans can also end in a lawsuit. The government and private lenders can sue in order to collect on loans. There is no time limit on suing to collect on federal student loans, and the borrower can be sued indefinitely. Private student loans, in most cases, are subject to statute of limitations
laws depending on the state.
Students should also seek the advice of certified financial advisors or lawyers specializing in bankruptcy. It absolutely is not true that you cannot reduce or eliminate your student loan debt by bankruptcy, although special procedures and conditions do apply.
In the rehabilitation program, a borrower must do a number of things. He or she must make at least 9 qualifying, on-time student loan payments. If any payments are missed, the borrower must begin the repayment schedule from the beginning. After borrowers complete the agreement, the guarantor transfers the loan to a lender and servicer. The loan is then considered out of default and back into repayment.
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
in the United States can have a number of negative consequences. To understand loan default, it is helpful to have a few common terms defined:
Loan Deferment is a postponement of a loan's repayment. There are many reasons why someone might seek to defer a loan, including a return to school, economic hardship, or unemployment.
Loan Delinquency is a failure to make loan payments when they are due. Extended delinquency can result in loan default.
Loan Default is the failure to repay a loan according to the terms agreed to in the promissory note
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
. A lender may take legal action to get the money back.
Consequences
Defaulting on a loan can adversely affect credit for many years. Default typically occurs when a loan receives no payment for 270 days. The loan leaves repayment status and is due in full when the lender requests. New collection costs are added to the loan’s balance and the loan becomes drastically more expensive than before. These costs can be reduced or eliminated through negotiation or legal action.There are other negative consequences resulting from a defaulted loan. A student who wishes to return to school cannot qualify for federal aid in the United States until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.
Individuals who are worried that they are unable to service their student loan debt should receive advice and counselling. There are numerous reliefs available. Student loan debt can be cleared through bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, although special procedures must be followed.
Garnishment of Wages and Tax Refund
In addition, the IRS can take the borrower’s income tax refund until the defaulted loan is paid in full. This is a popular way of collecting on loan debt, and the Department of Education collects hundreds of millions of dollars this way.To object, a written statement must be presented within 65 days of the IRS’ notice, and must give evidence of any of the following:
- The loan has been repaid.
- Payments have been made under a negotiated repayment agreement, or a cancellation, deferment or forbearance has been granted.
- The borrower has filed for bankruptcy.
- The borrower is totally and permanently disabled.
- The loan in question is not the borrower’s loan.
- The borrower dropped out of school and the school owes a refund.
- The borrower attended a trade school and the school closed.
- The school falsely certified the borrower as being eligible for a loan.
The government can also garnish wages as a way to recover money owed on a defaulted student loan. The United States Department of Education
United States Department of Education
The United States Department of Education, also referred to as ED or the ED for Education Department, is a Cabinet-level department of the United States government...
or a Student Loan Guarantor
Student Loan Guarantor
A guarantor is a person or agency that agrees to pay someone else’s debt should he or she default on a loan. In the case of student loans in the United States, the government guarantees the federal loans that students borrow...
can garnish 15% of a defaulted borrower’s wages. The loan holder does not have to sue the borrower first. The borrower can object to the garnishment, but only under very specific circumstances, such as if his weekly income is less than 30 times the federal minimum wage.
Defaulting on student loans can also end in a lawsuit. The government and private lenders can sue in order to collect on loans. There is no time limit on suing to collect on federal student loans, and the borrower can be sued indefinitely. Private student loans, in most cases, are subject to statute of limitations
Statute of limitations
A statute of limitations is an enactment in a common law legal system that sets the maximum time after an event that legal proceedings based on that event may be initiated...
laws depending on the state.
Getting Out of Default
There are rehabilitation programs designed to help borrowers get out of debt. Rehabilitation is a federally mandated program that gives federal student loan borrowers a way to bring their loans out of default. Rehabilitation can reverse the many negative consequences of defaulting on a student loan, and participation is a right granted to a federal education loan borrower.Students should also seek the advice of certified financial advisors or lawyers specializing in bankruptcy. It absolutely is not true that you cannot reduce or eliminate your student loan debt by bankruptcy, although special procedures and conditions do apply.
In the rehabilitation program, a borrower must do a number of things. He or she must make at least 9 qualifying, on-time student loan payments. If any payments are missed, the borrower must begin the repayment schedule from the beginning. After borrowers complete the agreement, the guarantor transfers the loan to a lender and servicer. The loan is then considered out of default and back into repayment.
Rehabilitation Benefits
After completing loan rehabilitation, borrowers once again become eligible to receive financial aid. With the loan no longer in default, wage garnishment and the seizure of tax refunds ceases. Borrowers are able to apply for deferment and forbearance benefits as long as these have not been exhausted during default. And last, the outstanding balance of the loan is no longer due in full.See also
- Cohort Default RateCohort Default RateA cohort default rate is the percentage of a school's borrowers who enter repayment on certain loans during a federal fiscal year and default prior to the end of the next one to two fiscal years...
- wage garnishment
- loanLoanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
- Default (finance)Default (finance)In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
- Higher Education Act of 1965Higher Education Act of 1965The Higher Education Act of 1965 was legislation signed into United States law on November 8, 1965, as part of President Lyndon Johnson's Great Society domestic agenda. Johnson chose Texas State University–San Marcos as the signing site...