Default and Repayment

None of us like repaying our student loans, yet we must do what we can. Issues arise when we cannot repay our student loans, and it goes into default. The following information applies only to Federal Student Loans:

The collection of federal student loans is a unique kind of beast. Collection tactics are different then those available for ordinary consumer debt, rules of collections are different, and what can and cannot be done is also different. For instance, when ED is collecting a defaulted loan, it can garnish wages without ever going to court (though an administrative hearing can be requested before such garnishment takes place). The point here is that because collections of federal student loans are so different, it is extremely important to pay attention and educate yourself as much as possible so you are not taken advantage of. The information here is a basic summary of the collection process. Links follow for further information.

If a borrower fails to pay a private institution that originated a FFEL loan and the loan enters into default, the institution will forward the loan to a private debt collection agency. If this does not rectify the situation, the private institution will transfer it to the private guarantor who works with the lending institution. The guarantor then has the option of using the available remedies or transfering the loan to ED. Note that debt collection agencies must comply with the Fair Debt Collection Practices Act (FDCPA), a federal law that governs what debt collectors can and cannot do. Although the loan may be in default, the borrower has a chance to cure the loan. In other words, there is a chance for redemption; to rescue the loan from default status. If the loan is not cured, that is the default is not fixed, collections are the same as if ED had originated the loan, as explained below.

If a direct loan, a loan originated by ED, enters into default, ED has a number of remedies at its disposal granted to it by the United States Congress. ED may intercept tax refunds, it can offset social security income, and it may administer wage garnishments. ED does not need to sue a borrower in court. However, there are administrative rules and procedures that ED must follow before it can intercept a tax refund, offset social security income, or garnish wages. The more troublesome fact is that ED may send a loan to a private debt collector to attempt debt collection. Again, these private debt collectors must comply with the FDCPA and cannot on their own intercept taxes, offset social security income, or administer wage garnishments. Even with all of these remedies, a suit may occur. Such suit is handled by the Department of Justice.

Note, there is no statute of limitation on federal student loans. A federal student loan is collectible and enforceable until you die. Also note that is it is extremely rare that a federal student loan can be discharged in bankruptcy.