The majority of students seeking higher education rely on student loans to help finance their education. Unfortunately, the job market for recent grads is not as it was five years ago. Jobs are harder to find than ever before, high paying jobs are even harder to land. While many students have moved home and live with their parents, the sparse job market makes it difficult to begin and keep current with repayment of student loans. As a result, it is easier than ever to consider defaulting on your student loans.
What Is Student Loan Default?
A federally insured student loan is made by the United States Department of Education. Generally, a loan is considered to be in default if 270 day pass without a payment, or payment arrangements made.
The Department of Education can take very stern measures to force you to pay your student loan. They have the right to have your tax refund redirected to them and applied towards your loan balance, they can garnish your wages or even your Social Security benefits. If you are a professional they will block your license renewal. It is nearly impossible to discharge a federally insured student loan through bankruptcy as the Department of Education has a program called income-based repayment. Under this program your monthly payment is set at an affordable amount, you do need to request it and prove need.
Contact the Department of Education before You Default
Rather than defaulting on your student loan, contact the Department of Education before you are in default and request that they send you the material to apply for an income-based repayment plan. If you do this and prove your income, they will give you an affordable payment; otherwise they will give the loan to a debt collection service. Once it has gone to debt collection, the private debt collection company can only offer you three options without Department of Education approval. They are:
- Waiver of collection charges (pays only the current principal balance and accrued but unpaid interest)
- The current principal balance plus half of the accrued but unpaid interest
- At least 90% of the current principal and interest balance
Remember, collection agencies are paid based on how much they can collect. They are experienced debt negotiators. However, they must abide by all laws applicable to debt collection agencies. But, employees of the Department of Education are exempt.
Important Contact Information
If the collection agency is being difficult (e.g., they will not offer any settlement amount), try calling the US Department of Education’s Default Resolution Group at 1-800-621-3115 or TTY 1-877-825-9923 or sending email to firstname.lastname@example.org. You can also try calling the FSA Ombudsman at 1-877-557-2575 or sending email email@example.com. The FSA Ombudsman does not negotiate settlement amounts, but at times they can help clarify a situation. If your loan is held by a guarantee agency, call 1-800-4-FED-AID (1-800-433-3243) for their contact information.
Defaulting on your student loans can dog you forever, call and make the best arrangements you can.