How To Avoid Defaulting On Student Loan Payments
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Colleges in the United States now have to pay penalties for extreme student loan default cases. This is in reference to an article published by the ‘New York Times’ in July of 2014.

According to the new regulation, colleges that have default rates of 30% or more in a year have to take a strategy for educating student borrowers so that they track their loans and repay on time. This rule will be effective starting in September of 2014.

The educational institutions that record 30% or higher loan default records for three years in a row won’t be eligible for the federal loan programs as well as the Pell Grant program. This poses a threat to the colleges with over-the-limit default ratios.

Some statistics by ‘US News’ shows that merely 60% of borrowers in the United States are repaying their educational loans on time, and the 40% rest are either in default, forbearance or deferment status.

Why Colleges have a Key Role to Play in Controlling Loan Default

The new rule mentioned above has been designed to provide protection to borrowers whose credit history gets blemished due to loan defaults. Poor credit scores prevent them from making other important purchases such as buying a home or a car. Many organizations even verify the prospective employees’ credit history before confirming the job.

Many college authorities have expressed concern that the new regulation is targeting and penalizing colleges that have borrowers from poor or low income families. However, research conducted by the ‘Association of Community College Trustees’ and the ‘Institute for College Access and Success’ refutes this claim.

The research further indicates that loan default rate depends on the quality of the educational support and counseling that borrowers receive from their colleges. For example, Valencia College based in Florida has a loan default rate of 19% compared to 26% at other colleges. The overall loan default rate for all the colleges is 22% as revealed by the study.

The variance in the default rate specified above is due to the approach colleges are taking when counseling student borrowers. Some colleges have implemented a mandatory orientation process. Even after borrowers leave college, college authorities keep in touch with those in delinquent status, and suggest suitable repayment options like the Income Based Repayment Plan.

What Causes Loan Default?

The most common reasons are unemployment, low income, other financial obligations, sickness and disability.

Due to these reasons many borrowers leave college before completing their academic program. According to the same research discussed above, the loan default rate is 27% among borrowers who left college midway through their degree. This rate drops drastically to 9% for borrowers who complete graduation. Hence, college authorities need to keep an eye on the struggling borrowers, and help them with counseling before they drop out of their studies due to overwhelming student debt.

Also, on many occasions borrowers take out multiple loans with different terms, interest rates and payment dates. Keeping track of all these often proves to be an uphill task for borrowers, and it may result in delinquency and potential default status.

Consequences of Student Loan Default

As mentioned earlier, the lack of employment or low-paying jobs affect borrowers’ ability to live and therefore their plan on making monthly loan payments goes out the window!

The major consequences of loan default are mentioned below:

  • The loans may be handed over to a collection agency
  • Federal benefits may be taken back by the government
  • Lenders can sue borrowers to retrieve their money
  • Wage garnishment
  • Credit history is affected
  • Tax refunds may be seized

When a loan goes to a collection agency, borrowers are likely to pay more in the forms of collection costs, late payment fees and other charges.

If a loan is in default status, borrowers have two ways to get out of it – firstly, they can get into a payment arrangement or rehab with their lenders, or they can consolidate their loans through suitable loan repayment plans.

How to Initiate the Loan Consolidation Process

Borrowers who are unable to pay off their student loans can consolidate them through federal direct consolidation programs such as the Income Based Repayment Plan and Income Contingent Repayment Plan. With the help of these plans, they can take control over their financial situation.

Borrowers need to keep in mind that they cannot combine their federal loans with private loans since the Department of Education doesn’t provide such leverage.

For the purpose of combining the federal loans, consulting a student debt relief firm is an effective way to get the most out of the federal loan consolidation programs. Such a consultant can guide you to choose the right repayment plan, according to your current financial condition and affordability. In this way, you can get relief from your overwhelming debt in a hassle-free way.

An Insight into the Income Based Repayment Plan (IBR)

Income Based Repayment Plan or IBR is one of the most effective and popular solutions for providing relief to borrowers from their increasing financial woes. Under this plan, the monthly payable amount is determined on the basis of a borrower’s income. Their total loan amount and outstanding debt are not considered.

Borrowers facing partial financial hardship can be eligible for this program. Once they qualify, monthly payments are reduced significantly, and after they make payments for 25 years, the government will forgive the remaining loan balance.

The Federal Family Education Loan (FFEL) Program and William D. Ford Federal Direct Loan Program loans are considered for the Income Based Repayment Plan.

The month of June 2014 brought additional relief to American borrowers as President Barack Obama made an announcement about the implementation of the ‘Pay as You Earn (PAYE)’ program. This program is actually the amended version of IBR. Under this plan, borrowers can cap their payments at 10% of their monthly income. Another advantage is that they need to make monthly payments for just 20 years. After this period, the remaining amount will be forgiven by the government.

In summary, borrowers have an effective solution provided by the federal government through which they can get out of default status and restore their credit history.


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