Money Matters, Simplified.
Student Loan Default: Consequences and Remedies
A boorish economy coupled with a rapidly escalating cost of education is responsible for the growing instances of student loan default. MT finds ways of dealing with this nuisance.
Fri, 08/20/2010 - 10:28 by Gunjan Mehra
At the time of obtaining the loan ensure that you are well conversant with all the pertaining terms and conditions, which can have a serious bearing on your financial life later. According to the findings of the U.S. Department of Education, the federal student loan default rate loans was 6.9 percent in 2007 and it has been rising each year.
The Cost of Collecting a Default Loan
1 If you work out a payment schedule, with the lender within 60 days of default, some collection agencies will waive or reduce the collection fee.
2The collection costs can legally be as high as 40 percent, perhaps even higher.
In this environment of uncertainty, prevalent in the job market, ascertaining a well paid job after graduating is becoming increasingly difficult. Hence, most students remain underemployed and underpaid.
Under such circumstances, being unable to repay loans taken for the purpose of education is but natural. However, non repayment of such loans is followed by certain serious consequences.
Read on to know more about student loan default and ways of preventing it. .
Understanding Student Loan Default
Loan default refers to failure on the part of a person to repay a loan as per the terms and conditions mentioned in the promissory note for which the lender is capable of taking legal action against the borrower.
When such a loan is obtained by a student for the purpose of his education and he subsequently fails to pay it back, it is termed as a student loan default.
Consequences
When a loan becomes overdue by 270 days it acquires a default status.
. Under such circumstances the amount of loan becomes due in full and requires to be repaid whenever the lender asks to do so.
. The amount due increases by many folds due to the addition of various other costs like the collection cost.
. A defaulter student is debarred for any other federal aid, if he decides to resume studies in the USA, until the defaulted loan is repaid satisfactorily.
Tips on Preventing Default
The following factors should be borne in mind before applying for a student loan:
How Much is Enough
Borrow the least possible amount. If your total borrowings are more than twice your estimated salary a beginner, chances are that you will be unable to repay the amount. You should hence, consider a revision in your debt, or switching over to a less expensive college.
Understand the Terms and Conditions
At the time of obtaining the loan ensure that you are well conversant with all the pertaining terms and conditions, which can have a serious bearing on your financial life later.
Make a Checklist
Once you have obtained a loan, assign a separate file for documenting all the papers relevant to the loan.
Also make a checklist comprising of all important dates of repayment, contact numbers and addresses of the lender to make your reference-work easier.
Get in Touch with Your Lender When Facing Trouble
Certain changes in your life can have a bearing on your ability to repay, inform your lender of the same.
You must convey your lender about a change of your intention to continue with your studies, change of college, change of name or college, etc.
Deferment or Forbearance of Loan
While experiencing financial difficulties of temporary nature, ask your lender how you could apply for a forbearance or deferment on your loan.
Meanwhile, continue repaying your loan, because once you default, you are unconsciously making your self ineligible for forbearance or deferment on it.
Other Payment Options
When you faced financial crunch, which you know is here to stay for longer, get in touch with your lender immediately.
Convey your present financial situation to him and he should be able to suggest an alternate repayment option. These might include:
. extended repayment
. graduated repayment
. income sensitive repayment
. income contingent repayment
. income-based repayment
All these alternate repayment plans are aimed at reducing the monthly amount of repayment, basically by spreading the burden of the outstanding loan amount on a longer time period.
Student loan default is an outcome of an economic catch 22. The root cause of the problem is slow growth rate of the economy, and the problem seems to further fuel an economic slowdown.
