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What Can I Do About a Defaulted Student Loan? What does it mean to default on a student loan?
For
federally guaranteed student loans under Title IV of the Higher
Education, a default occurs when you fail to make payments on your loan
for (a) 180 days if you repay in monthly installments or (b) 240 days
if the payments are due less frequently. During the time that you are
behind in your payments, your lender must exercise "due diligence"
(make repeated efforts to find you and contact you about repayment) in
attempting to collect the loan from you. If the lender is unsuccessful,
it will usually place the loan in "default" and turn it over to the
"guaranty agency" in your state. Lenders may "accelerate" a defaulted
loan, which means that the entire balance becomes due in a single
payment.
Once your loan is
assigned to a guaranty agency or the U.S. Department of Education for
collection, several steps, including the following, may be taken to
recover what you owe:
credit bureaus may be notified [under 20 U.S.C.1080 or 20 U.S.C. 1087cc (c)] and your credit rating may suffer,
the IRS (under 34 CFR 30.20-30.33) may withhold your tax returns,
you
may be subject to an Administrative Wage Garnishment where the
Department of Education ( under 20 U.S.C. 1095a), will require your
employer to forward 10-15% of your disposable pay for repayment, or
the Department may take legal action to force you to repay.
Once
a loan is declared in default, you are no longer entitled to any
"deferments" or "forebearance" (explained below). In addition, you may
not receive any additional Title IV federal student aid if you are in
default on any Title IV student loan.
How can I escape default?
There
are generally three things to do to avoid or escape defaulting on a
student loan when you are unable to pay. They are:
1) cancel or discharge (end your obligation to repay) the loan,
2) renew or consolidate the loan into a new loan, or
3) temporarily stop making payments.
When can I cancel or discharge a student loan?
All
student loans authorized by Title IV of the Higher Education Act can be
canceled if you die or become permanently and totally disabled [but you
cannot be considered disabled on the basis of a condition that existed
when you applied for the loan unless it has substantially deteriorated,
34 CFR 682.402 (e)]. Stafford, PLUS, and WLS loans disbursed ( given to
you) after January 1,1986, can be canceled under two additional
circumstances:
(a) the school you attended improperly certified your ability to benefit from the training given, or
(b)
the school you attended closed while you were in attendance or within
90 days after you withdrew from the school.
In
addition to the above four reasons, a National Defense Student Loan can
be canceled if you enter into full-time teaching or military service. A
National Direct Student Loan and a Perkins Loan can be at least
partially canceled under two more additional circumstances: becoming a
Head Start Program Staff Member or a Peace Corps Volunteer.
A Perkins Loan can be at least partially canceled under 5 different additional circumstances:
1) As a Peace Corps or VISTA Volunteer,
2) As a full-time law-enforcement or corrections officer for loans received after 11-29-90
3) Entering a full-time teaching position
4) Becoming a full-time nurse or medical technician for loans disbursed after 7-23-92, or
5)
As a full-time employee of a public or private nonprofit child or
family services agency if your loan was disbursed after 7-23-92.
Can I discharge a student loan in bankruptcy?
Under certain circumstances you can discharge your obligation to repay a student loan in bankruptcy.
The criteria is set out at 11 U.S.C. 523 (a) (8). Currently your loan
may be discharged only if the first payment became due on the debt at
least seven years before the bankruptcy was filed.
Any
grace periods, forebearance, or deferments must be subtracted from the
time elapsed between when the first payment became due and the filing
date. Loans outstanding for less than the required seven-year period
can be discharged only if the bankruptcy court makes an express finding
that repayment would place an "undue hardship" on you.
If
your obligation to repay a student loan is discharged in bankruptcy,
any co-signers or endorsers of your debt are not discharged. For
example, if your parents co-signed your student loan, they are still
liable for repayment
How do I apply to cancel or discharge my loan?
First
find out who is currently holding your loan. Check the collection
notices that you have been receiving. Additionally you may call the
Federal Student Aid Information Center at 1-800-433-3243
(1-800-04-FED-AID). If the guarantor agency has the loan you should
deal with it. If the Department of Education is holding the loan, deal
directly with the Department. If the Department has referred your loan
to a collection agency, inform the agency in writing that you are
contesting the debt by filing for a discharge of the Department of
Education. If you defaulted on a Perkins Loan, it may still be held by
your college and you should contact it for more information.
To
apply for discharge or cancellation you must submit a written request
with a statement made under penalty of perjury indicating:
- that you received at least part of your loan after 1-1-86, and
-
whether you have made a claim relating to the loan to the a state
tuition coverage program or surety for the school, and so, the amount
of any recovery, and
-
that you agree to cooperate with the Department in any action to
recover money related to the loan from third parties (like
school-owners or their affiliates), and
- you agreed to provide other reasonably available documentation, if requested.
You
will also have to attest to other matters specific to the reason you
are seeking the discharge. For example, you will have to give
information regarding school closing or false certification if you are
seeking cancellation on either of those grounds.
Who qualifies for discharge due to school closure?
If your school (or the branch which you attended):
[1] closed while you are still either
(a) enrolled or
(b) on an approved leave of absence, or
[2] you withdrew from the school within 90 days of its closure,
you
may qualify for discharge. 34 CFR 682.402 (d). After the school closed,
you must not have completed the program of studies through a "teach
out" at other school or by transferring academic credits or hours
earned at this closed school to another school.
A school's closure date is the date when it ceased offering all
programs, not when it stops offering the particular program in which
you were enrolled. The Department of Education determines the closure
date, which you can find out from Department's Cumulative List of
Closed Schools. The Department's list is not always accurate so you may
have to prove an earlier closing date by newspaper accounts,
correspondence with the school, etc.
If
your loan is discharged, you will owe no more payments, You will get a
refund of past payments. Moreover, the servicing agency will tell
credit reporting agencies that the loan was discharged. Any bad credit
history should be deleted. You can now apply for more federal student
financial aid. The full criteria for a closed school discharge may be
found at 34 CFR 682.402 (d).
Who qualifies for discharge due to false certification?
If
you were admitted to a school without a high school degree after
7-1-87, you are generally able to get a false certification discharge.
The Department will find the school falsified your ability to benefit
in the program unless you did one of the following:
1)
passed an "ability to benefit" test approved by the Department (or
prior to1991 by an accrediting agency) that was administered properly,
2) successfully completed a program of developmental or remedial education provided by the school, or
3) enrolled before 7-1-91 and received at GED before completing your program of instruction.
If
your loan is discharged, you will owe no more payments, You will get a
refund of past payments. Moreover, the servicing agency will tell
credit reporting agencies that the loan was discharged. Any negative
credit history should be deleted. You can now apply for more federal
student financial aid. The full criteria by which borrowers may qualify
for a false certification discharge may be found at 34 CFR 682.402 (e).
Once I have defaulted, is there any way to reinstate the loan?
Yes.
The Department of Education offers "Loan Rehabilitation" program. If
you make 12 consecutive monthly payments, which are both reasonable and
affordable, the Department will agree to reinstate the loan. You would
then be eligible to have the loan purchased by a bank or other lending
institution . Once a loan is rehabilitated, it will be taken out of
default and the credit bureau reports made by the servicing agency will
be deleted. You will be able to repay the loan over a nine year period.
You will again be eligible for additional Title IV student financial
aid funds.
If I cannot discharge my loan but cannot afford the payments, what can I do?
The
federal government offers two types of consolidation loans to allow
students for students to combine different types of federal loans to
reduce and simplify payment. The two programs are a Federal Family
Education Loan (FFEL) and the Federal Direct Consolidation Loan
(hereafter, Direct Loan). Generally, the Direct Loan offers more
generous terms for the borrower.
The
Direct Loan is designed for those who can afford to repay their
existing student loans. Borrowers make monthly payments based on yearly
family incomes. Borrows with family annual incomes of less than $900
above the poverty level need not make any payment on the loan.
Once
you get the loan, the old loans disappear. You are eligible for new
loans, grants, and deferments. You will no longer be listed as in
default on credit records, and will not be subjected to tax intercepts,
garnishments, or other collection efforts. The Direct loan has several
advantages over the FFEL. Included are:
it is easier to qualify because it is unnecessary to make three regular
payments before qualifying as is required to obtain a FFEL,
the Direct Loan offers lower payments than a FFEL,
borrowers with Direct Loans may be in a better position than those with FFELs in seeking deferments
Direct Loans offer somewhat lower interest rates over the life of the loan that those offered by a FFEL
Some
Direct Loan borrowers, due to their low incomes, may be making no or
very low payments. These low payments may not cover accrued interest.
The amount of the loan is increased to include the unpaid interest.
After interest is charged on the accrued interest, the loan balance can
increase significantly. There are some positive features of the Direct
Loan program, however, than offset some of these negative facts. They
are:
borrowers may seek loan deferments during which period, the government pays the accrued interest,
a cap is placed on interest to keep it under control,
after
25 years of payments (even if payments were zero over the entire time
period) the loan is forgiven. However, periods of deferment or
forebearance, during which the borrower is excused from making
payments, are not counted. Note: when the loan is forgiven, the amount of the loan has to be counted as income on your tax return.
What is a FFEL and what should I know about it?
Like the Direct Consolidation loan, the FFEL helps borrowers
consolidate several loans with various repayment schedules in one loan.
You make only one monthly payment. Under the program, the new loan will
be made by a commercial lender. Credit bureaus will be notified that
your account has a zero balance. You will sign a new promissory note
with a new interest rate and repayment schedule.
To
qualify you must first be in "repayment" status on your defaulted loan
(that is, you must make three voluntary, on time, regular monthly
payments). You become eligible for other federal loans. As with the
Direct Consolidation Loan you must give your consent to the IRS to
disclose to the Department of Education certain income tax information.
This information is necessary in order to calculate a monthly repayment
plan based on your income which you must agreed to accept.
The
monthly payments on a FFEL must, at a minimum, equal all interest as it
accrues, while Direct Loan monthly payments may go as low as zero. In
order to receive a Direct Loan, you must certify that you could not
obtain a FFEL or get one with a repayment plan satisfactory to you.
Are there disadvantages to getting a consolidation loan?
There
are some disadvantages to getting either type of federal consolidation
loan. As noted above, you may be able to bankrupt your student loan
seven years after the first payment became due. A loan consolidation
may start the seven-year time period running again. Moreover, if you
are considering challenging the loan, a consolidation loan may waive
some defenses if you later contest the loan in court. If you believe
you may be going to court to fight against a loan, or are considering
bankruptcy, you should consult a lawyer before applying for
consolidation.
Another
disadvantage of consolidation is that while you cure the default by
consolidating a loan, your credit continues to show that at one point
you were in default. If you "rehabilitate" a loan instead (see above),
any reference to the default is removed. Also after consolidation
collection fees become part of the loan principle.
Finally,
borrowers may have more opportunity to compromise the amount owed on
old loans than on a consolidation loan. To compromise the amount owed
means you negotiate repayment of lower amount than the total owed.
However, this usually requires a lump sum payment of a major portion of
the loan. Most lower income people cannot afford the lump sum payment.
Is there anyway to temporarily stop making loan payments?
There
are two ways to temporarily stop making payments and/or to avoid a
default. You may request the Department of Education to grant you a
"deferment" which allows you to stop payments (and stop interest from
accruing as well). You must meet specific criteria in order to qualify
for a deferment. You may request the guaranty agency for a forbearance
of payments for short period when poor health or personal problems
which affect your ability to pay. Interest continues to accrue during
forbearance.
What are the criteria for obtaining a deferment?
There
are two sets of standards for obtaining deferments. The old standards
applied to loans disbursed before 7-1-93. The new standards which are
somewhat more generous applied to loans disbursed after 7-1-93.
Some of the more important grounds for deferral of loans disbursed prior to 7-1-93 are:
- unemployment (maximum of two year deferment),
- full-time student at participating school,
- active duty status in the U.S. Armed Forces,
- receiving, or being scheduled to receive service, under a program designed to rehabilitate disabled individuals,
- temporary total disability,
- providing nursing or similar services to a spouse who is temporarily totally disabled,
- parental leave, and
- being a mother of preschool children starting work at no more than $1.00 above the minimum wage
The
standards for loans disbursed after 7-1-93 are somewhat more generous.
The maximum unemployment deferment period is increased from two to
three years. The old three-year deferments for specified types of
financial hardship (temporary total disability, taking care of a
disabled dependent, parental leave, and mother with preschool children
making slightly more than wage, etc.) are placed by a new three-year
deferment category called "economic hardship". If you receive public
assistance, you automatically qualify. If you do not, the Department
will apply a complicated formula to decide if you qualify.
How can I obtain a forbearance on my loan?
The
Department encourages lenders to grant forbearance if you are in poor
health or other personal problems affect your ability to make scheduled
payments. Forbearance is not as helpful as a deferral because interest
continues to build while the loan payments are reduced or postponed.
The size of the outstanding debt could actually increased during a
forbearance period. However, forbearance is available even the loan
is in default. Seeking forbearance would allow you to avoid default
during the time in which you cannot afford to make payments.
Lenders
must grant forbearance when your debt exceeds 20% of your gross income
and you submit a written request. Under those circumstances a lender
must grant forbearance for one year and shall renew it for a second
and third year under certain conditions. Moreover, the fact that you
are granted a forbearance cannot be the cause of a negative credit
report and no fees can be charged. Unfortunately this right is limited
to loans held by lenders. It does not apply if the loan has been taken
over by guaranty agency or the Department.
If
you are in default or on the verge of defaulting on your student loan
you may wish to obtain legal advice. If you do not know an attorney or
cannot afford one you may call:
Legal Aid Center of Southern Nevada
800 South Eighth Street
Las Vegas, Nevada 89101
(702) 386-1070
(800) 522-1070
(702) 366-0569 (fax)
TDD: (702) 386-1059 (hearing impaired)
For additional information which may be of assistance regarding student loans check the following Web sites:
A new web site, Student Loan Borrower
Assistance http://www.studentloanborrowerassistance.org , will help address
student debt problems and includes information on repayment options,
avoiding and getting out of default, dealing with collections agencies,
and much more.
U.S. Department of Education Debt Collection Service: Guide to Defaulted Student Loans
http://www.ed.gov/offices/OPE/DCS
William D. Ford Federal Direct Loan Program Home Page
http://www.ed.gov/offices/OPE/Direct Loan/
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