Student loan default

Defaulting on a student loan can have a number of negative consequences. To understand loan default, it is helpful to have a few common terms defined:
Loan Deferment is a postponement of a loan's repayment. There are many reasons why someone might seek to defer a loan, including a return to school, economic hardship, or unemployment.
Loan Delinquency is a failure to make loan payments when they are due. Extended delinquency can result in loan default.
Loan Default is the failure to repay a loan according to the terms agreed to in the promissory note. A lender may take legal action to get the money back.

Consequences

Defaulting on a loan can adversely affect credit for many years. Default occurs when a loan receives no payment for 270 days. The loan leaves repayment status and is due in-full when the lender requests. New collection costs are added to the loan’s balance, and the loan becomes drastically more expensive than before. There are other negative consequences resulting from a defaulted loan. A student who wishes to return to school cannot qualify for federal aid in the United States until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.

Garnishment of Wages and Tax Refund

In addition, the IRS can take the borrower’s income tax refund until the defaulted loan is paid in full. This is a popular way of collecting on loan debt, and the Department of Education collects hundreds of millions of dollars this way.

To object, a written statement must be presented within 65 days of the IRS’ notice, and must give evidence of the following:

• The loan has been repaid.
• Payments have been made under a negotiated repayment agreement, or a cancellation, deferment or forbearance has been granted.
• The borrower has filed for bankruptcy.
• The borrower is totally and permanently disabled.
• The loan in question is not the borrower’s loan.
• The borrower dropped out of school and the school owes a refund.
• The borrower attended a trade school and the school closed.
• The school falsely certified the borrower as being eligible for a loan.

The government can also garnish wages as a way to recover money owed on a defaulted student loan. The United States Department of Education or a Student Loan Guarantor can garnish 15% of a defaulted borrower’s wages. The loan holder does not have to sue the borrower first. The borrower can object to the garnishment, but only under very specific circumstances, such as if his or her weekly income is less than 30 times the federal minimum wage.

Defaulting on student loans can also end in a lawsuit. The government and private lenders can sue in order to collect on loans. There is no time limit on suing to collect student loans, and the borrower can be sued indefinitely.

Getting Out of Default

There are rehabilitation programs designed to help borrowers get out of debt. Rehabilitation is a federally mandated program that gives federal student loan borrowers a way to bring their loans out of default. Rehabilitation can reverse the many negative consequences of defaulting on a student loan, and participation is a right granted to a federal education loan borrower.

In the rehabilitation program, a borrower must do a number of things. He or she must make at least 9 qualifying, on-time student loan payments. If any payments are missed, the borrower must begin the repayment schedule from the beginning. After borrowers complete the agreement, the guarantor transfers the loan to a lender and servicer. The loan is then considered out of default and back into repayment.

Rehabilitation Benefits

After completing loan rehabilitation, borrowers once again become eligible to receive financial aid. With the loan no longer in default, wage garnishment and the seizure of tax refunds ceases. Borrowers are able to apply for deferment and forbearance benefits as long as these have not been exhausted during default. And last, the entire outstanding balance of the loan is no longer due in full.

Federal student loan consolidation

In the United States both the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program (FDLP) include consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. This results in reduced monthly repayments and a longer term for the loan. Unlike the other loans, consolidation loans have a fixed interest rate for the life of the loan.

Interest rates and payments

Consolidation loans have longer terms than other loans. Debtors can choose terms of 10–30 years. Although the monthly repayments are lower, the total amount paid over the term of the loan is higher than would be paid with other loans. The fixed interest rate is calculated as the weighted average of the interest rates of the loans being consolidated, assigning relative weights according to the amounts borrowed, rounded up to the nearest 0.125%, and capped at 8.25%. Some features of the original consolidated loans, such as postgraduation grace periods and special forgiveness circumstances, are not carried over into the consolidation loan, and consolidation loans are not universally suitable for all debtors.

History

The Federal Loan Consolidation Program was created in 1986. In 1998, the United States Congress changed the interest rate to the aforementioned fixed rate weighted mean, effective February 1, 1999. Consolidation loans taken out before that date had a variable interest rate, determined by the individual FDLP loan origination center (e.g., in the case of a university, that university) or FFELP lender (e.g., a third party bank).

In 2005, the Government Accountability Office considered consolidating consolidation loans so that they were exclusively managed through the FDLP. Based on several assumptions about future variations in interest rates, the loan volume, the percentage of defaulters, cost estimates from the United States Department of Education, it concluded that while doing so would incur an additional cost of $46 million, caused by the higher administrative costs of the FDLP compared to the FFELP, this would be offset by a $3,100 million saving comprised in part of avoiding $2,500 million in subsidy costs. In 2008, turmoil in the financial and credit markets has led to the suspension of many loan consolidation programs, including Sallie Mae, Nelnet and Next Student.

Stafford Loan

A Stafford Loan is a student loan offered to eligible students enrolled in accredited American institutions of higher education to help finance their education. The terms of the loans are described in Title IV of the Higher Education Act of 1965 (with subsequent amendments), which guarantees repayment to the lender if a student defaults.

In 1988, Congress renamed the Federal Guaranteed Student Loan program the Robert T. Stafford Student Loan program, in honor of U.S. SenatorRobert Stafford, a Republican from Vermont, for his work on higher education.^[1]

Because the loans are guaranteed by the full faith of the US Government, they are offered at a lower interest rate than the borrower would otherwise be able to get for a private loan. On the other hand, there are strict eligibility requirements and borrowing limits on Stafford loans.

Students applying for a Stafford loan or other federal financial aid must first complete a FAFSA. Stafford loans are available to students either directly from the United States Department of Education through the Federal Direct Student Loan Program (FDSLP, also known as Direct) or from a financial intermediary (such as Chase, Sallie Mae or Student Loan Corp.) through the Federal Family Education Loan Program (FFELP).

No payments are expected on the loan while the student is enrolled as a full or half time student. This is referred to as in-school deferment. Deferment of repayment continues for six months after the student leaves school either by graduating, dropping below half-time enrollment, or withdrawing. This is referred to as the Grace Period.

Stafford loans are available both as subsidized and unsubsidized loans. Subsidized loans are offered to students based on demonstrated financial need. The interest on Subsidized loans is paid by the federal government while the student is in school, during the grace period, and during authorized deferment. For unsubsidized Stafford loans, students are responsible for all of the interest that accrues while the student is enrolled in school. The interest may be deferred throughout enrollment. Unpaid interest that is deferred until after graduation is capitalized (added to the loan principal).

Interest on Stafford loans may vary and are determined based upon the date the loan was disbursed.

Calculations to determine undergraduate Stafford loan rates

Stafford Loan Disbursement Date	Rate Type	Subsidized Interest Rate	Unsubsidized Interest Rate	Current Rate (2009-2010)
Prior to July 1, 1998	Variable	91-Day T-Bill + 3.1%	91-Day T-Bill + 3.1%	3.28%
July 1, 1998 to June 30, 2006	Variable	91-Day T-Bill + 2.3%	91-Day T-Bill + 2.3%	2.48%
July 1, 2006 to June 30, 2008	Fixed	6.8%	6.8%	6.8%
July 1, 2008 to June 30, 2009	Fixed	6.0%	6.8%	6.8%
July 1, 2009 to June 30, 2010	Fixed	5.6%	6.8%	6.8%
July 1, 2010 to June 30, 2011	Fixed	4.5%	6.8%	6.8%
July 1, 2011 to June 30, 2012	Fixed	3.4%	6.8%	6.8%
July 1, 2012 to June 30, 2013	Fixed	6.8%	6.8%	6.8%

Refund anticipation loan

A refund anticipation loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund, and designed to offer customers quicker access to funds than waiting for their tax refund.

United States

In the United States, taxpayers often apply for a refund anticipation loan through a paid professional tax preparation service, where a fee is typically charged for the preparation of the tax return. In the United States the Internal Revenue Service rules prohibit basing this fee on the amount of the expected refund. An additional fee is usually charged by the service for originating a bank product. By law this fee must be the same on both loan and non-loan bank products, and in 2004 the average fee was $32.^[1] The bank through which the loan is made charges interest or finance charges.

According to the National Consumer Law Center, 12 million taxpayers used an RAL in 2004.^[2] With e-filing and IRS partnerships that help consumers e-file for free, U.S. taxpayers can receive their tax refunds within three weeks and as quickly as ten to fourteen days if choose to receive their refund via direct-deposit. This has rendered RALs less attractive to some.^[3]

1. ^ "Building a Better Refund Anticipation Check". Consumer Law. http://www.consumerlaw.org/initiatives/refund_anticipation/content/BuildingBetterRAC.pdf. Retrieved on 2008-10-16.
2. ^ "E-filing can make high-fee loans unnecessary - Tax Tactics". MSNBC.com. http://msnbc.msn.com/id/11362964/.
3. ^ "Cheaper and still fast alternatives to refund anticipation loans". http://www.bankrate.com/brm/itax/news/20010131b.asp.

Payday loan

A payday loan (also called a paycheck advance or payday advance) is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card (see cash advance). LegislationUSA, between different states. regarding payday loans varies widely between different countries and, within the

Some jurisdictions impose strict usury limits, limiting the nominal annual percentage rate (APR) that any lender, including payday lenders, can charge; some outlaw payday lending entirely; and some have very few restrictions on payday lenders. Due to the extremely short-term nature of payday loans, the difference between APR and effective annual rate (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.15²⁶ − 1) × 100% = 3,685%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.