Defaulting on student loans is bad, especially if they are federal loans. Federal loans are one of three types of student loans (Federal, Private, and State). What make a loan a federal loan is that the United States Department of Education guarantees (insures) the loan. A federal loan is deemed in default if it is 270 days late. Once in default, the entire balance of loan is due and debt collectors become involved. The greatest concern for most borrowers with a defaulted loan is the large jump in the balance. The balance increases because of collection fees, which can be as high as 25% of the loan's balance. Federal loans also give the lender the ability to use an administrative wage garnishment (AWG) to collect on a defaulted loan. Up to 15% of a person's disposable income may be garnished.
The frightening thing about AWGs is that the lender does not have to file a law suit and get a judgment first. This is an administrative remedy – no legal action needs to be initiated. Borrowers in default on federal loans may also have their tax refunds intercepted, social security payments offset, and find themselves in litigation with the Department of Justice. Federal employees in default can have as much as 15% of their pay offset. Borrowers with Federal or State licenses (doctors, lawyers, real estate professionals) may find their licenses in jeopardy.
The good news about federal loans is that they have the most options and borrower rights. In addition to a deferment and forbearance, there are options that allow borrowers to consolidate, repay based on income, rehabilitate a defaulted loan, have the loan forgiven, and have the loan administratively discharged. Again, most of these options are never explained to borrowers.Student Loans from Private Lenders
Private student loans originate from private lenders and are not guaranteed (insured) by the government. So, none of the remedies discussed above are available for private loans. State law governs the enforcement of these loans. So, a statute of limitations will likely come into play as will any available state law remedies or defenses. Generally, enforcing a private loan is no different than enforcing credit card debt.
One big difference between credit card debt and private student loans is that private loans are generally not dischargeable in bankruptcy. A chapter 13 bankruptcy (essentially a consolidation of your debts) may be used to make affordable payments on private loans for up to five years. Any remaining private loan balance will not be discharged and will survive the chapter 13 bankruptcy. Chapter 13 for private loans is not a solution; it's more about financial management and staying out of litigation.
Most people believe there is nothing that can be done to get relief from student loan debt. This is simply not true. There are a number of options available to assist student loan borrowers. Unfortunately, much of this has not been highly publicized so most borrowers are left in the dark. The law firm of John V. Lee, LLC, can help you understand your student loan options and assist you maximizing the federal loan options available to you and assist in getting your private student loans under control. There may be solutions available to you that can drastically change your financial future. Contact our office today for a consultation.