Understanding the Student Loan Default
More than 400 million individuals in the US today are struggling to pay back their student loans. Student loan debt has skyrocketed over the last few years, reaching to around $1.2 trillion. This not only affects the country’s economy, but also affects the ability of the borrower to live a stress-free life.
When applying for a student loan, it is important that you consider your payment capacity and all the penalties of defaulting on a student loan. To help you understand the cost of student loan default, we are listing different types of penalties that one can face if they fail to make timely loan payments.
What is Student Loan Default?
When an individual takes out a student loan, they are required to sign a promissory note contains all the terms and conditions of loan repayment, such as interest rate, repayment term, penalties on loan default, etc. This is a kind of legal contract between the borrower and the lender, and failure to comply with the terms and conditions of the contract may result in legal action.
Difference between Default and Delinquency
An individual is considered to be default if they fail to make monthly payments according to the terms and conditions of the promissory note. The lender can put the ‘default’ status on a loan after 270 days of non-payment.
On the other hand, a loan enters delinquency period on the first day the borrower misses a monthly payment. The period continues for nine months after which the individual is considered to be defaulted. The lender is legally bound to send a collection letter to the borrower during the first two weeks of delinquency period.
What are the Consequences of Defaulting on a Student Loan?
Defaulting on student loans can cause you to face serious consequences. The lender doesn’t consider the financial hardships you are facing, and you are legally bound to make loan payments even if you don’t have a steady income. In addition to a poor credit score, there are several other consequences of defaulting on loans, which are discussed below.
1. Tax Offset
Using this method, the lender may divert the money of your income tax refund to pay back your outstanding student loans. Tax offset may continue until the defaulted loan is paid back in full.
2. Wage Garnishment
If you fail to make loan payments for consecutive nine months, the lender or security agency may contact your employer and ask them to deduct 15 percent of your disposable daily income, which is diverted towards your student loan repayment. This process may continue until the defaulted loan is paid back in full.
Wage garnishment must be conducted in a lawful manner and the lender must send a notice explaining the process of wage garnishment to the borrower 30 days prior to wage garnishment.
3. Collection Costs
In case an individual defaults on their student loans, the lender may take services of a collection agency to collect debt from the borrower. The collection costs charged by the collection agency are paid by the borrower. Collection costs vary according to the type of student loan, but it may go as high as 40 percent of the principal amount in case of a Federal Perkins loan.
4. Loss of Eligibility for Student Aid
Individuals who fail to make timely monthly payments for nine months become ineligible to receive any kind of federal student aid in future.
What the Student Loan Relief Department Can Do For You?
Defaulting on a federal student loan is scary. Not only it makes the entire outstanding amount payable immediately, it also inhibits you from receiving any kind of federal student assistance in future. In order to make timely monthly payments, you must initiate with the selection of right kind of student loan and loan repayment methods.
The Student Loan Relief Department is a private organization that can help you explore your loan repayment options and save you from going default on your federal student loans. Even if you have already defaulted on a loan, we can help you resolve it through consolidation or rehabilitation.
So, if you want to avoid annoying collection calls by the lender or their agent, you can call us at (844) 677-0550.