So, a student may find him- or herself in default, the consequences of which are severe.
The federal government can act without a court order to force repayment of defaulted federal education loans (federal Stafford loans, federal PLUS loans and federal consolidation loans).
According to Kantrowitz, The federal government can also sue defaulted borrowers to seize assets such as bank, brokerage and retirement accounts, place liens on real estate and increase the wage-garnishment amount beyond the 15 percent administrative wage-garnishment limit. After all other attempts to collect the defaulted student loans have failed, the US Department of Justice will sue to recover money from defaulted borrowers who owe more than $45,000 and who are more than four years delinquent. Borrowers who owe less than $45,000 may be sued by private attorneys working on contingency fees that are usually about a third of the amount recovered on behalf of the federal government.
Students who default also need to know that they will be charged for the cost of collecting the debt. As much as 20 percent of each loan payment on a defaulted federal education loan will be deducted for collection costs before the remainder of the payment is applied to the interest and principal balance of the loan, according to Kantrowitz.
Collection charges slow the borrower’s progress in repaying the debt. A loan that would normally take 10 years to repay will take at least 14 or 15 years to repay at the same monthly payment after collection charges are deducted, said Kantrowitz.
Don’t think about defaulting on purpose with the idea that the government will settle for a lower amount. The US Department of Education almost never settles defaulted federal student loans for less than the full loan balance at the time of default, according to Kantrowitz.
There is help, however. The Department of Education can offer a repayment plan to help — for example, the extended repayment, income-based repayment (IBR) and pay-as-you-earn repayment (PAYER). Extended repayment increases the repayment term from 10 years to as much as 30 years, based on the amount owed. IBR bases the monthly payment on a percentage of the borrower’s discretionary income, defined as the amount by which adjusted gross income exceeds 150 percent of the poverty line. PAYER is similar to IBR, but bases the monthly payment on 10 percent of discretionary income instead of 15 percent.
But, keep in mind that these programs may not be available after a student defaults.
Next week, let’s talk about how to get a student organized to start repaying student loans.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org).