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Repayment Begins for Students Who Graduated in May and June

Mark Kantrowitz

October 26, 2011

Don’t Ignore the Debt

Whatever you do, don’t ignore the problem. Talk to your lender before you skip a payment. Ignoring the debt will make it get worse, since interest will continue to be charged, increasing the loan balance. You also lose options if you default first. For example, borrowers who have defaulted on a federal education loan are no longer eligible for deferments and forbearances.

A default occurs when you are 360 or more days late on a federal education loan or 120 or more days late on a private student loan.

The money is owed even if you didn’t graduate. Repayment begins six months after the borrower graduates or drops below half-time enrollment. Payments are due even if you are dissatisfied with the quality of your education. The defense of infancy, statute of limitations and the defense of laches do not apply to federal education loans.

Collection charges of up to 25% will be deducted from each payment on a defaulted federal education loan, regardless of whether the payment is voluntary or involuntary, increasing the amount of time and money it will take to pay off the debt.

It is almost impossible to discharge student loans in bankruptcy. A bankruptcy discharge required filing an undue hardship petition in an adversarial proceeding, a very harsh standard. One bankruptcy judge refered to it as requiring a “certainty of hopelessness”. Statistics from 2008 indicate that only 29 of 72,000 (0.04%) federal education loan borrowers with active bankruptcy proceedings succeeded in getting a full or partial discharge of their student loans. You’re more likely to die of cancer or in a car accident than to get your student loans discharged in bankruptcy.

The government also has very strong powers to compel repayment. The government can garnish up to 15% of your wages and intercept federal and state income tax refunds and lottery winnings without a court order. The government can also offset up to 15% of Social Security disability and retirement benefit payments. The government can also sue you to collect the debt; they typically do this for defaulted borrowers who owe $45,000 or more.

If you default on a private student loan, the lender can sue you to seize assets and garnish your wages. They can also seek repayment from your cosigner.

Delinquencies and defaults are reported to the three major credit reporting agencies, ruining your credit (and the credit history of your cosigner, if any). You will find it very difficult to get credit cards, auto loans or mortgages. It will also be difficult to rent an apartment or get a job, since many landlords and employers will check your credit history. After all, federal education loans are among the easiest to repay, making it likely that you’ll default on your other obligations too.


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