Student loan debts have skyrocketed over the last decade, reaching to around $1.2 trillion. Outstanding student loan balances not only affect the country’s economy, they also lead to negative consequences for the borrower. It is important to consider all the penalties and costs of defaulting on your student loan before applying for one. The borrower should also consider the repayment options and their ability to pay back the student loan.
Understanding the Student Loan Default
Whenever a student applies for a federal student loan, they are required to sign a promissory note that binds them in a legal agreement with the lender. The promissory note contains the repayment term, interest rate, consequences of defaulting on the loan, and other terms and conditions.
What is Default?
A borrower is considered to be default if they fail to repay the loan according to the terms and conditions of the promissory note. The default status is put by the lender after 270 days of non-payment.
What is Delinquency?
The delinquency period begins on the first day after you miss a monthly payment. The delinquency period continues for nine months after which the borrower is considered to be defaulted. During the first two weeks of delinquency period, the lender is required to send at least one collection letter to the borrower.
Consequences of Student Loan Default
Defaulting on student loans has serious consequences. Once you have graduated, you are required to repay the loan even if you are unable to find a job or facing financial hardships. Falling into default leaves negative impact on your credit report, which means that you may face difficulty in getting any loan in the future.
There are a number of consequences associated with student loan default such as wage garnishment, tax refund, debt collection, loss of eligibility for federal student aid, etc.
In case of student loan default, the lender or the guaranty agency may order your employer to deduct 15 percent of your disposable pay per day, which contributes towards the repayment of the loan. Wage garnishment continues until there is no outstanding balance on your student loans.
Wage garnishment is used as a collection tool for borrowers who refuse to pay back their loans voluntarily. The lender is required to send a notice explaining the action to be taken 30 days prior to wage garnishment.
Tax offset is the process of diverting the money you are eligible to receive in the form of income tax refund to pay back your outstanding student loans until the defaulted loan is paid in full.
Loss of Eligibility for Federal Student Aid
If you get defaulted on any student loan, you become ineligible to get any new student loan in the future. This can be very problematic for individuals who are pursuing higher education, but they become unable to complete their program because lack of financial aid and become unable to find a job.
Defaulting on your student loan not only makes the entire principal amount payable immediately, it also capitalizes any interest outstanding at the time of default. Collection costs are also charged by the collection agency, which vary according to the type of loan. It may go up to 40 percent for Federal Perkins loans.
How TurboDocs Can Help You?
There is nothing quite as scary as receiving a bill that you cannot pay. However, it is important that you explore the options available to you. You may talk to your lender to make necessary arrangements and seek out a plan that is suitable for you and your financial circumstances.
If you are defaulting on a student loan, you may take help of a company such as TurboDocs. We can talk to the lender and ask them to help you explore your options that may prevent you from going default on your student loans.
Contact TurboDocs to talk to our experts by calling us at (855) 782-0744.