Student Loan Default Should Be Avoided

Francine L. Huff
LoanBiz Columnist

Article Rating , 4 out of 5 based on 1 votes

Defaulting on student loans is serious business. Anyone who borrows using student loans is responsible for repaying them--even if they have trouble finding work after graduation. With more Americans defaulting on student loans, concerns are rising about how consumers handle all of their debts.

Rising Default Rate

Those with federal student loans and private loans issued by banks and other firms are increasingly defaulting on these loans. United Student Aid Funds Inc., the largest guaranty agency of federal student loans, told the Wall Street Journal that default claims had risen 22% during the 2007 fiscal year. Spokesman Robert Murray told the Journal, "The problem is not excessive borrowing from the federal programs. What is really impacting these borrowers is the private debt that they're taking on in addition to their federal student loans."

Consequences of Default

When borrowers don't made payments for more than 270 days, their student loans are considered to be in default. According to FinAid, about 75% of people who default on student loans do it after leaving school without completing their degree. People who default on student loans may:

  • See their loans turned over to a collection agency
  • Be sued for the amount of the loan
  • Have their wages garnished
  • Have their state and federal income tax refunds withheld
  • Be liable for all court and other costs related to collecting the loan.

Student Loan Deferments

People having trouble with student loan repayments do have a couple of options to keep from defaulting. By contacting their lenders, borrowers may be able to postpone payments by asking for deferment. That will allow them to put off repaying the principal on their loans for a certain period of time. Depending upon the loan program, interest may or may not continue to accrue. People with federal loans can usually apply to defer payments if they are:

  • Enrolled in school
  • Unemployed
  • Suffering an economic hardship
  • Disabled and participating in a rehabilitation program.

Getting a Forbearance

If a lender allows forbearance on a loan, student loan repayments will be postponed or reduced for up to three years. However, during the forbearance period interest will continue to accrue and must be paid by the borrower. The borrower must apply for forbearance and show proof of financial hardship or some other type of unusual circumstance.

If a loan has already gone into default, it's not too late to correct the situation. Borrowers should contact their lenders and make arrangements to repay their loans. But the best plan is to avoid default in the first place by keeping consumer debt to a minimum and making student loan repayments on time and in full.

Wall Street Journal
"Student-Loan Worries Add to Debt Worry," by Keith Winstein and John Hechinger, www.wsj.com.

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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