The Good News / Bad News on Student Loan Default
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In
today's worrying economic climate, many recent and soon-to-be
graduates may be concerned about the possibility of
student loan default. So, in a nutshell, here is the
good and bad news about loan default and what it means
for you.
First, it's important to know what student loan default
is. You are considered in loan default when you have
made no scheduled payments on your student loans for
at least 270 days. This applies to anyone whose loans
are currently considered in repayment. If your loans
are being deferred because you are currently attending
school at least half-time, or for any other reason,
your loans will not go into default.
Bad news first.
To the federal government, defaulting on your student
loans is considered almost as serious as not paying
your taxes. So it can come with some pretty hefty penalties.
These may include:
a) Serious damage to your credit report. - The
negative effect on your credit report created by loan
default cannot be underestimated. Even if you've never
been in default, the ability you've shown to repay/manage
your student loans is one of the first things a loan
officer may look at in addition to your credit rating
when determining eligibility for a car or home loan.
b) Withholding of wages and other income. - The
government may decide to garnish your wages, a certain
percentage being withheld from you and going directly
to loan payments before the rest of your monthly paycheck
reaches you. Other funds such as federal tax returns
and lottery winnings can also withheld. Of course, if
you win the lottery, paying off student loans should
be on the top of your priority list anyway.
c) Professional license and transcript blocks.
- If you have earned a professional license, such as
a medical, cosmetology, or real estate license, you
can be prevented from receiving that license while your
loans are in default. An even more common problem is
a transcript block. Many jobs available to college grads
require that you submit a copy of your college transcripts
as a part of the application process. If your loans
are in default, the school(s) you've attended are not
allowed to release official transcripts to other institutions
until the default is resolved.
But the good news is.
For most of us, it's not easy to go into student loan
default. No one (the schools, lender banks, guaranty
agencies, or the federal government) wants you to go
in to default. So you do have options and resources
to help you keep that from happening. Some of these
are:
a) Deferment and Forbearance - Deferment allows
the postponement of payments in cases of economic hardship,
re-enrollment in school, or disability. Forbearance
is a similar condition which allows for the lowering
of minimum monthly payments based on your situation.
b) Alternate payment programs. - Rather than
a standard loan repayment schedule, you may choose an
income sensitive, graduated, or extended plan. Graduated
and income sensitive repayment plans may be a good option
for those who are unsure how much they will be earning
during their first years out of college or entering
into an unstable job market. Extended repayment is an
option available to borrowers with more than $30,000
in federal loans. It allows you to repay over a 25-year
period, rather than the standard 10 years.
c) Consolidation - Under current federal loan
programs you may be eligible to consolidate your student
loans. In essence, consolidation involves taking out
a new loan with a lender bank or servicer to cover all
of your current student loans. This allows you to work
with a single lender bank (rather than multiple banks
if you took out your student loans through more than
one lender), may lower your monthly payments, and opens
up whatever new payment options your consolidation lender
may offer. Many banks offer consolidation loans, some
even marketing them aggressively through mail and phone
solicitations. So it's important to approach this option
with the attitude of an informed consumer to determine
what offers might work best for you.
As always, the first and best resource you have when
it comes to managing your student loans are the people
who are there to help and work with you. If you've started
missing payment, chances are your lender bank is already
trying to contact you. It's best though if you speak
with your bank's representatives before it reaches that
point, and always make sure they have current contact
information for you.
Also, the financial aid counselors/administrators at
your school should be available for you to consult with
even after graduation. Repayment is a process that takes
place primarily between you and your lender bank, but
a school's FA counselor can at least point you in the
right direction even if they don't have all of the details
you are looking for.
Author: Kevin Hodges worked as a college financial
aid counselor at a major university before moving on
to a freelance writing career.
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