If you miss payments on your student loan then this can have
serious consequences. If you are making monthly payments and
the payments are 270 or 330 days late than payment date or if
you pay less than the monthly payment quite often then you are
in a case of default.
What should you do while borrowing :
When you take a student loan you are required to read the fine print. Now unless you are given a loan deferment, forgiveness or forbearance you are required to pay the loan on time. Despite the fact that you would not have finished school or wouldnt have found a job or you might be unhappy with your education but still you would have to pay the student loan on time. Apart from this when you leave school you are required to attend an exit interview where you are supposed to inform the school authorities about the change in your phone number and address.
The effects of defaulting :
The effect of defaulting on a student loan can either be short term or long term. The short-term effect of defaulting could result in delaying the class registration and the delay in getting the transcripts or the certificates. Besides this you are be demanded to pay the full loan amount immediately.
The long-term effects of the defaulted loan can be more serious. When you default on a student loan the default is reported to the national credit bureau and this can damage your credit rating severely. Once you have a poor credit rating you can further be denied of loans for either financing a house or a car or you can even be denied for a credit card.
Defaulting on the student loan can result in serious consequences like failure to get credit checks for jobs, depreciation in the wages, you can even be taken legal action against, and you can be refused for any federal aid. Besides this you can also be ineligible to renew any professional license that you have. When you default on the student loan apart from the balance that is due the cost can go up to as much as 25-50% of the principle amount. The additional costs that you would have to pay would include the commission of the collection agency and the collection costs, the legal fees, the interest accumulated and the late charges and also the phone charges that the school has made in the attempt to collect the loan payments.
According to the Higher education Act the lender has the right to look for the borrower and trace him down in the delinquency period before the borrower is labeled with default. In case the lender fails to trace the borrower or the borrower does not start repaying the loan amount then the case is handed over to the government agencies for action. When a student loan enters the default then the maturity period becomes immaterial and he borrower is required to pay the full amount of the loan immediately.
The case of defaulted student loans is handed over to guarantee agencies and they follow strict procedures to collect the defaulted student loans. The main objective of the collection agencies is to help the borrower pay the loan easily. But in case the borrower does not respond to the notices given by the collection agencies then the borrower can have some serious problems. The collection department selects one of the many methods for collecting the amount. Some of these methods are mentioned below.
Wage garnishment: under this act the Federal
Department of Education and the guaranty agency can ask the
employer of the defaulting borrower to deduct some amount maybe
up to 10-15% from the income every month. The amount that is
deducted every month is paid towards the repayment of the student
loan. The wage garnishment method is applicable only to borrowers
that default willingly on the student loan and they refuse to
Treasury offset: with this option the department
of education makes a request to the treasury department to carry
out a federal offset for the refund given on the federal income
tax so that the loan debt can be collected from the defaulting
borrower. In other words the student is refused from getting
any tax refunds till the loan amount is paid back.
Legal procedure: it is quite possible that
the collection agency can take legal action against the borrower
who has defaulted on the student loan. The borrowers who refuse
to make payments have to go through the prosecution at the federal
or the state court. When the case is filed against the borrower
it is to recover not only the loan amount but also the court
fees and the fees of the authority. This is the last option
for the collection agency after the defaulting borrower has
ignored all the previous notices.
To stay away from all these hassles it is better to avoid any case of default. You should not borrow more than the amount that you can afford to pay back. Before you sign up for the loan you should understand all the terms and conditions of the loan so that there is no problem when the repayment period starts. You should keep all the loan papers in place and keep a check on the payment schedule. In case you are caught in default you should make arrangements with the lender and work out a payment schedule within the 60-day period of default. Defaulting on a student loan can be a serious matter and before you get into any such condition it is advised that you keep your finances in order.
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