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
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.
Ask Kantro: What are the Downsides to Using Home Equity to Refinance
Student Loan Debt