Older Is Wiser | Federal student loans: What to expect from default
Federal student loans: What to expect from default
Posted on: 23 May 2016 by david soto
Once you have your federal student loans there is no escaping repayment. They are non dischargeable and you can be pursued for non payment relentlessly and indefinitely.
Defaulting on these loans is not a wise option as the consequences will resonate on many areas of your life and can cost you in more than just financial terms.
Whilst most other kinds of loans can be in default at 60 days overdue, federal student loans are not marked as in default until 270 days late, but once default is reached then the borrower becomes liable for the full amount of the loan plus interest.
One of the consequences of defaulting on a federal student loan is that you will no longer be eligible for any further federal loans, so defaulting on an undergraduate loan will close the door to federal funding for any postgraduate education plans you have in mind. It will also lose you the opportunity to receive deferment on other federal student loans you hold.
In addition it will severely damage your credit rating thus losing you any chance of obtaining auto loans, mortgage loans or personal loans, unless you use the services of a subprime lender.
One of the lesser known problems of student loan default is that it can cost you any professional licence which you hold which is necessary for your employment. Such licences can simply not be renewed, or they can be cancelled or revoked, thus costing you your professional position.
The consequence of defaulting on federal student loans
The obvious consequence of defaulting on federal student loans is that the lender will pursue you, perhaps passing your account to a debt collection agency to chase, thus increasing the balance of the debt as collection costs are levied. As the loan is a federal one then federal tax or state taxes in the form of refunds due to you can be taken by the IRS to use towards the outstanding balance of your debt.
State benefits such as social security retirement benefits and social security disability benefits can be intercepted and used towards the debt. Administrative wage garnishments can be enforced with your employer having to send 15% of your disposable wages towards the loan, thus causing professional embarrassment.
If you allow your loans to fall into default then the consequences are your responsibility. There is no need to go into a default situation if you are open with your lender and seek advice if you experience problems coping with the repayments. There are various options open to the borrower long before default is reached and these should actively be pursued rather than simply allowing the debt to default. Federal student loan default will follow you for a long time and is an expensive route to go down.
Federal Student Loans – What You Need to Know
Four types of federal student loans exist for persons needing money for college. They are subsidized Stafford loans, unsubsidized Stafford loans, Parent PLUS loans, and Federal Perkins loans.
Originally called “Guaranteed Student Loans” (GSL), Stafford loans were re-named in honor of Senator Robert Theodore Stafford, who served as governor of Vermont, as well as a Representative and Senator from that State. There are two types of Stafford loans-unsubsidized and subsidized.
Unsubsidized Stafford loans can be obtained by anyone attending college. A person applying for an unsubsidized Stafford loan does not have to show proof of financial need in order to apply or receive this type loan.
The interest on an unsubsidized Stafford loan begins to accrue at the time of the first loan disbursal, and continues until the loan has been completely repaid.
A subsidized Stafford loan does require proof of financial need before the loan is granted. Further, the Government pays the interest on a subsidized Stafford loan up until the time repayment begins.
Repayment on both subsidized and unsubsidized Stafford loans is expected to begin six months after the borrower leaves school (whether through graduation, deciding to no longer go to college, or after enrollment hours fall below those in which a person is considered to be at least a half-time student).
Parent PLUS loans (PLUS stands for Parent Loans for Undergraduate Students) are applied for and granted to PARENTS of students who are still considered dependants, and are still taking undergraduate courses. It is expected that the money will be used for educational expense purposes, and no other. Acceptance of the application and the amount granted is based on the parents’ credit history.