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Is There a Better Option for Financing a College Education than a Parent PLUS Loan?

If a borrower defaults on a student loan, the lender may turn the loan over to a collection agency, which is paid a commission based on the amounts recovered. Collection costs are paid by the borrower, not the lender, so the lender has little or no incentive to limit collection charges. Collection charges of up to 25% of the principal and interest payment (20% of the total payment) may be deducted from voluntary and involuntary payments on a defaulted Federal Stafford or PLUS loan. Collection charges on the Federal Perkins loan may be up to 30% of the payment for principal, interest and late charges for a first collection attempt and up to 40% for subsequent collection attempts. If a defaulted federal education loan is rehabilitated, collection charges of up to 18.5% may be added to the loan balance. Private student loans may charge higher collection fees on defaulted loans.

Defaulting on a student loan will ruin the borrower’s credit (and the credit history of the cosigner, if any), making it difficult for the borrower to get new credit cards, auto loans and mortgages. The borrower may even find it difficult to rent an apartment or get a job, since many landlords and employers check for bad credit.

If a borrower defaults on a home equity loan or line of credit, the borrower may lose the home. See also Ask Kantro: What are the Downsides to Using Home Equity to Refinance Student Loan Debt.