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2008
Fall
Conference
Special Features
What
Default Means
Credit
Card Responsibility
PUBLICATION SCHEDULE
| Issue |
Due Date |
 |
Fall
|
9/15 |
| Winter |
12/01 |
| Spring |
04/15 |
| Summer |
06/30 |
Submit articles to
Melissa Rakes
|
What
Default Means to Your Students
Submitted
by: Tasha McDaniel, School Training Director, Great
Lakes Higher Education Guaranty Corporation
As you review your default prevention efforts, it’s important
to remember that each default represents an individual borrower—one
of your former students who is suffering the consequences of a damaged
credit rating and reduced professional opportunities. Your students
hear about the consequences of default several times while they are
in school, but they may not understand how default relates to them.
You have the opportunity to make the consequences of default more
meaningful to them by using the following explanations.
Defaulting on Student Loans May Mean:
- A Damaged Credit Rating. Guarantors are required
to report student loan defaults to all national credit bureaus. As
a result, borrowers who default may have a damaged credit rating for
at least seven years. A poor credit rating may mean that a bank will
require the borrower to pay a higher interest rate for loans and credit
cards than other customers. It may also prevent the bank from agreeing
to make a mortgage or car loan to a borrower. Poor credit could possibly
prevent the borrower from obtaining desired jobs because many employers
now run credit checks on prospective employees, especially those who
will handle cash and financial transactions.
- The Loss of Deferment and Forbearance Benefits.
Borrowers who default lose the benefits of the Federal Family Education
Loan Program (FFELP), which include the options to temporarily postpone
student loan payments due to hardship. It’s important to encourage
borrowers to work with their lender to resolve any repayment problems
long before the loan defaults.
- Federal Income Tax Offset. Guarantors are required
to provide the U.S. Treasury Department with a listing of borrowers
who do not make arrangements to pay their defaulted loans. As a result,
a borrower’s federal income tax refund may be seized. Instead
of receiving a refund check from the Internal Revenue Service, the
borrower might receive a letter from the Treasury Department stating
that the income tax refund was intercepted and applied (net of a surcharge)
to the borrower’s defaulted student loan balance.
- Additional Fee Assessments. Guarantors are required
to charge collection fees on defaulted loans and borrowers may be
assessed fees of up to 24% on each payment made after default. Adding
the collection fees to the outstanding principal and interest balance
dramatically increases the total amount needed to pay a defaulted
loan in full. Assuming a 24% collection fee, a defaulted borrower
who makes a monthly payment of $100 will pay $24 in collection costs.
The remaining $76 will be applied to outstanding principal and interest.
- Garnished Wages. Guarantors are required to initiate
wage garnishment proceedings against borrowers who do not make arrangements
to pay their defaulted loans. This means that the borrower’s
employer may deduct 10–15% of the borrower’s pay from
every paycheck and forward that amount to the guarantor to be applied
toward the defaulted loan balance. This means that the borrower will
receive a smaller paycheck and his or her employer will know about
the defaulted student loan.
- Lost Student Loan Eligibility. If defaulted borrowers
choose to go back to school, they may not be able to obtain additional
FFELP financial aid. In order to regain FFELP eligibility, borrowers
must either pay the defaulted loan in full or make a payment each
month for six consecutive months.
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