Tag: Default

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Watch Out for This 16% Student Loan Fee

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Watch Out for This 16% Student Loan Fee

The Trump administration has made it possible for debt collectors to once again charge hefty fees to some student loan borrowers who miss several payments in a row — even if those borrowers make an effort to get back on track right away.

These fees, which can be as high as 16%, are typically levied against the borrower’s entire outstanding loan balance and accrued interest charges. The so-called “collection charges” are meant to help recoup losses incurred by pursuing unpaid debts.

In a recent letter, the U.S. Department of Education rescinded an Obama-era rule that forbade guaranty agencies — debt collectors charged with recouping unpaid federal student loan debt — from charging defaulted borrowers collection fees if the borrowers began a repayment plan within 60 days of defaulting on their loans. In the new letter, the agency said the previous guidance should have included time for public comment and review before it was issued.

The reversal comes days after the Consumer Federation of America released an analysis of Department of Education data that shows the rate of student loans in default has grown 14% from 2015 to 2016.This certainly isn’t the first Obama-era rule or legislation the new administration has sought to undo, with an Obamacare replacement plan on its way to a vote in the House and plans to unravel regulations meant to crack down on for-profit colleges and universities.

A Department of Education spokesperson declined to comment.

Bad news for 4.2 million borrowers

The changes will impact borrowers who took out federal student loans under the old Federal Family Education Loan (FFEL) Program. The FFEL Program was phased out in 2010 and replaced with the current Direct Loan Program, but millions of borrowers are still paying back FFEL loans issued prior to that change. Those who have loans under the Direct Loan Program will not be impacted by the changes.

As it stands, some 4.2 million FFEL borrowers are currently in default on loans that total $65.6 billion, according to Department of Education data. Loans are considered to be in default after 270 days of nonpayment.

The changes will raise the stakes for borrowers struggling to make payments on their federal student loans, and make it even more important for those borrowers to avoid missed payments.

Fortunately, federal student loan borrowers are eligible for several flexible repayment methods, as well as forbearance and deferment.

An Ongoing Debate

The debate over a servicer’s right to charge borrowers a default fee has gone on for several years.

In 2012, student loan borrower Bryana Bible sued United Student Aid Funds after she was charged more than $4,500 in fees after defaulting on her loans. She started a repayment agreement to resolve the debt within 18 days, but was still charged fees.

The Department of Education sided with Bible and said companies had to give borrowers 60 days after a loan default to start paying up before they are charged fees. The Obama administration backed the Department of Education and issued the letter when the court asked for guidance on the issue.

There is one clear winner with this rule change: debt collectors.

“Rescinding the [previous guidance on collection fees] benefits guarantee agencies at the expense of defaulted borrowers,” says financial aid expert Mark Kantrowitz. He adds the change may increase the cost of collecting defaulted federal student loans, since borrowers will have less incentive to quickly rehabilitate their defaulted student loans.

What Happens If I Default on My Federal Student Loans?

Federal student loans are considered to be in default after a borrower misses payments for 270 days or more.

About 1.1 million federal student loans were in default status in 2016, according to Department of Education data.

The consequences of going to default are severe.

  • The entire balance of your loan + interest is immediately due
  • You lose eligibility for deferment, forbearance, and flexible repayment plans
  • Debt collectors will start calling
  • Your credit will suffer
  • And … your wages and/or tax refunds could be garnished

Are you missing federal student loan payments?

You’ve got options.

  • Contact your loan servicer ASAP
  • Find out if you’re eligible for a flexible repayment plan
  • Or ask about forbearance

Already in default?

  • Ask your loan service about loan rehabilitation
  • If you make 9 on-time payments over the course of 10 months, your default status will be lifted

You’ve only got one shot to rehabilitate your federal student loans after going into default. Don’t miss it.


Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com


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Borrowers Beware: Auto Defaults in the Private Student Loan Market

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

mortar board cash

When a tragedy befalls a loved one, the last thing you want to hear is further bad news, but some private student lenders have a knack for turning bad news worse. According to the Consumer Finance Protection Bureau, when a responsible borrower’s  co-signer undergoes bankruptcy or dies the borrower may wind up with the shocking news that his or her student loan will go into default if he or she does not pay the entire balance of the loan within 30 days.

Like all loan defaults, “Auto Default” can destroy credit and make it difficult to access loans, rent new apartments, or get a new job.

Such unscrupulous lending behavior seems arbitrary and unprofitable, but it remains too common. In the six months between October 2013 through March 2014, the Consumer Finance Protection Bureau investigated 2,300 Private Student Loan cases and 1,300 Debt Collection cases where borrowers were either put into “Auto-Default” or were unable to release their co-signers from their loans.

Although private student loans comprise just 7.6% of the student loan market, more than one third of all student loan borrowers had some private loans as of 2007-2008, so many people are exposed to Auto-Default risk.

If you’re a borrower with private loans, these are the facts about Auto Default that you need to know.

How private student loans enter auto default

By 2011, more than 90% of private student loans required a co-signer to back the loan. Co-signers enable you to access lower interest rates and greater amounts since the co-signers promise to pay back the loan if you default.

Since private loans are contingent upon co-signer creditworthiness, most lenders retain clauses that allow banks to call a loan in full if the co-signer goes into bankruptcy or if they die. Although banks claim they do not intend to trigger this option, the CFPB reports that many exercise this option when the loan has been sold or is part of a securitization trust.

Depending on the circumstances, calling the loan may be illegal because it demonstrates operating out of poor faith and with unfair lending practices. However, you may feel there’s little recourse when your loans must be paid within 30 days.

How to prevent auto default 

The best way to prevent auto default is to release a co-signer as soon as you are able to do so. Most student loan servicers market that co-signers can be released from a loan after a certain number of on time payments and if you have a qualifying credit score. It should be easy to release a co-signer, but the Consumer Federal Protection Board found that more than 90% of all attempts to release co-signers were rejected.

As a result, the CFPB recommends using its sample document to ensure that you receive complete information about your eligibility to release your cosigner. In particular, if your co-signer is in poor health or financial trouble, then you should double down on your efforts to release a co-signer.

If you are ineligible for a co-signer release, you should have the option to change co-signers if you believe that your co-signer puts your credit score or payment schedule at risk, but eligibility requirements for changing co-signers vary from lender to lender and even from contract to contract.

Often, the best way to release a co-signer from a private student loan is to modify the loan or refinance it. Private student loans are notoriously difficult to modify, but refinancing with a different company may be possible for people with good to excellent credit. 

What to do if you enter auto default 

Though the CFPB has proposed legislation to make lending practices more transparent, you must act quickly if you’re in auto-default to avoid it destroying your credit.

If a collections agent informs you that your loan is in default, then you should request a verification of debt from the collections agent. The collector must provide information about the loan balance and the original lender, and you can use that information to reach out the lender directly. Do not attempt to negotiate with the collector, unless you’re prepared to pay the sum, since they cannot restore your credit.

If the bank informs you about the auto default, then you should get into contact with the bank to attempt to reverse the default and modify the loan. Under many circumstances, both borrowers and the bank are likely to come to the conclusion that modifying the loan may be in both parties best interest.

Once you are in contact with a bank, then you should propose mutually beneficial solutions like modifying a loan include to release a co-signer, allowing a period of time to find a new co-signer, or enabling a refinance.

If you cannot convince the lender to modify a loan and reverse a default, then you should submit a complaint to the Consumer Federal Protection Bureau. The CFPB works on behalf of consumers to ensure prompt responses and resolution. This is only for private student loans as the Federal Aid Ombudsman deals with federal student loan issues.

In some cases, the CFPB can work quickly enough for you to avoid default. However, if you are put into auto default, then you will need to clean up your credit. To determine whether anything needs to be done, you need to check your credit score (full report available at AnnualCreditReport.com), to be sure it is free from negative information. If the student loan entered default, the default will be present in the credit report and the CFPB can work with you and the lender to be sure that the negative information is removed. 

Will Auto Defaults Stop?

Even with proposed reforms in the private student lending market, you remain at risk for auto-defaults as long as you have a co-signer on your loan. The best way you can protect yourself from auto-defaults is by removing co-signers or refinancing your loans without a co-signer.
The CFPB works to protect consumers through action and reform, but you put yourself in a stronger position when you proactively work to avoid the pitfalls associated with unscrupulous lending practices in the private student loan market.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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How to Get Student Loans Out of Default

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Depressed man slumped on the desk with his hands holding credit card and currency

Have you been struggling to make the minimum payments on your student loans? If so, you might be at risk of defaulting on them. The worst thing you can possibly do with any debt is end up in default, as there are dire consequences that could wreck your credit for years to come.

If you’re wondering what happens when your student loans are in default, what that means for you, the difference between being delinquent or default on your loans, or how you can get out of default, read on for some advice.

Defaulting vs. Delinquency

There’s a huge difference between simply being delinquent on your student loans and defaulting on them.

Your student loans are considered delinquent as soon as you fail to make a payment on them. After 90 days, the lateness is reported to the credit bureaus.

Some private student loans have different rules – missing one payment may cause your loans to go into default. It’s important to understand the terms of your agreement for that reason.

Defaulting typically means your loans haven’t been paid for 270 days or more (if you pay on a monthly basis). If you pay less than once a month, your loans are considered default after 330 days of no payments.

Why exactly can a loan be considered “in default”? When you borrowed the funds for your student loans, you signed a master promissory note, which was a promise to make good on repaying the loan under the terms you agreed upon. Failure to pay directly violates that agreement.

[6 Things to Know About Defaulting on Student Loans]

Consequences of Defaulting on Your Student Loans

There are several severe consequences of defaulting on your student loans. You may or may not know that the government can garnish your wages and keep your tax refunds to collect payments if you have any debt in default. It’s not a good feeling to know your income can be taken away like that – in a sense, it doesn’t even belong to you.

Both the government and private lenders can also sue you. Your credit may take a major hit, and this will make it incredibly difficult to qualify for any financing. Additionally, you might not get approved for utilities, an apartment, a cell phone plan, or renter’s / homeowner’s insurance. As you can see, the negative effects of a bad credit score are far more than just access to credit. Plus, a late payment can take up to seven years to drop off your credit report.

With federal and private loans, your lender can go through the normal process of sending your student loans to collections. You may receive calls from debt collectors, and you’ll also incur late fees or returned payment fees, and thus, bank fees (if your account is negative or overdrawn). Interest will continue to accrue as well.

With federal student loans, your entire remaining balance becomes due once you’ve defaulted. Talk about overwhelming! You also lose access to all federal student loan benefits such as forbearance, deferment, and alternative repayment plans.

If you’re thinking about going back to college, you also won’t be eligible for more aid.

Are you a federal employee? 15 percent of your disposable pay can be offset by your employer to go toward repaying your loans.

As for private student loans, again, make sure you check and understand the terms of your agreement. If you have any questions, contact your loan servicer so they can explain how their system works. Private lenders generally have to go through some more hoops to collect payment, but that doesn’t mean they won’t. Each lender is different.

How to Get Out of Default

You may have heard that you can’t include student loan debt in a bankruptcy – that’s not exactly true, but there’s an easier way to rehabilitate your loans.

First, if you only have federal student loans, you may have an easier time getting out of default. That’s because consolidating your student loans with the Direct Federal Loan Consolidation program actually allows you to get out of default.

Yes, you can consolidate loans that are default, but you must make voluntary payments and arrangements with the Department of Education beforehand. Typically, that means three timely and consecutive payments.

Second, if you can get access to the money, repaying your remaining loan balance in full, all in one lump sum, will get you out of default.

Third, if you have federal student loans, then you can rehabilitate them through a government program. There are several steps involved in the process, and you must be in a position to make nine out of ten consecutive monthly payments. You can only miss one month, though ideally, you can make all payments without trouble.

Thankfully, your payments under the rehabilitation program should be more manageable. This is due to the fact you’ll be under an income-based repayment plan. If you were repaying under the standard 10-year repayment plan, then your monthly payment will be less than you’re used to.

Once those nine payments are made, you’ll be able to get the default off your credit report, restoring the status of your loan and your credit score.

Note that any payments made toward your loans via wage garnishment before you began rehabilitating your loan will not count toward your balance. Also, if any delinquencies were reported before you defaulted, they will not be removed from your credit – only information associated with the default is removed with rehabilitation. Lastly, if there are any collection/late fees due, they will be added to your total balance, increasing the cost of the loan.

Takeaway: Take Action As Soon as Possible

Again, if you’ve been struggling to make payments on your student loans, you need to get in contact with your loan servicer immediately. Some servicers will be willing to work with you, especially if you’ve already been paying on time. This is doubly true for those with private student loans.

Explain your situation to your servicer and how you would benefit from a lower monthly payment. They may be able to provide you with an alternative, such as lowering your interest rate, increasing the length of your term, or granting you a period of forbearance or deferment.

Even if your loans are already in default, you should get in touch with your loan servicer. They won’t be able to help you unless you talk to them and let them know you’ve been experiencing financial hardship. Don’t count on a lender to take the initiative – that’s up to you.

Also, in some rare cases, your loans may have been reported as default in error. If you’re certain you’ve been making payments and haven’t been late, get in touch with your loan servicer to see what records they have on file.

Remember – you have nothing to lose and everything to gain by contacting your loan servicer and ignoring your student loans won’t make them go away. The more days that go by without a payment, the worse your situation gets.


Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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Miss A Student Loan Payment? Where To Find Help And What Happens

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Mixed Race Young Female Agonizing Over Financial Calculations in Her Kitchen.

If you’ve missed a student loan payment or are struggling to make payments, you’re not alone. According to the Department of Education, millions of loans are currently delinquent, with many more being sent to collections every day.

What happens when you can’t afford to make a payment, and subsequently miss the due date? If you have federal student loans, at first, you’ll be delinquent. Nine months after you miss a student loan payment, your loans will then enter into default status.

If you have private loans, there’s no “grace period” of delinquency; your loans are immediately in default the day after your payment was due.

While this might sound like bad news, there are ways to recover from delinquency and default. We’re covering what the consequences are, and what options you have to get your loans current again.

What Does Being Delinquent Mean and What Are the Consequences?

Do you remember that promissory note you had to sign every semester when taking out student loans? That note was a binding contract in which you promised to make timely payments on your student loans (among other things). By missing a payment, you are in direct violation of that contract.

The day after your payment is due, you are considered delinquent on your student loans. During your delinquency, your student loan servicer will attempt to get in touch with you in the first 15 days following a missed student loan payment.

Your credit score can also suffer if you don’t make any payments within a certain time. For example, My Great Lakes will report a lateness to the 3 major credit bureaus (Experian, Equifax and TransUnion) once an account is 60 days past due, but Nelnet will wait 90 days. Different servicers have different guidelines for this, so it’s best to call yours directly to ask them for the specifics.

Even if you become current on your loans, the delinquency can remain on your credit report for up to 7 years.

Additionally, you might incur late fees if you don’t make an effort to pay within a set time frame. Late fees vary by lender, and the amount of time passed before getting hit with a late fee also depends on the lender.

While being delinquent isn’t great, it’s not the end of the world. Simply making a payment will bring your loan into repayment again.

But what if you can’t afford that payment?

After nine months of missed payments, your loan will go into default. Nine months is a considerable amount of time to work with your student loan servicer in an attempt to lower your payments, and that’s exactly what you should do.

Steps You Can Take To Get Out of Delinquency

If you’re delinquent on your student loans, the absolute best thing you can do is to get on the phone with your student loan servicer and explain your situation to them. You want them on your side in this process, and most are willing to help you out. Many servicers have information and options on lowering payments directly on their website.

If you can afford to make any sort of payment, do so. This will show your loan servicer that you’re concerned and making every effort to rectify your delinquent status.

The worst thing you can do in this situation is to ignore what’s going on. You have 9 months in which to make things right before going into default, and you want to do everything in your power to make sure you don’t get reach that point.

When speaking with your loan servicer, ask them to review your payment options.

Under certain circumstances, you may be eligible for deferment or forbearance. Both will excuse you from having to make any payments for a set amount of time. Interest doesn’t continue to accrue if your loans are in deferment, but it will accrue in forbearance.

Typically, forbearance is easier to qualify for than deferment, and there’s no limit to how many months you can ask to stay in forbearance. But because interest accrues, and you’re not making payments, your loan balance will grow every month you’re in forbearance.  But you won’t have any negative marks on your credit report.

If you’re not eligible for either of these options, don’t lose hope. There are several different income-based repayment options out there, including Pay as You Earn, Income-Based Repayment and Income-Contingent Repayment, and your student loan servicer will point you toward the one that makes the most sense for you.

Your number one priority when your student loans are delinquent is to get them current as soon as possible so that they don’t go into default.

What Consequences Does Defaulting On Your Student Loans Have?

If you haven’t been able to make any payments toward your student loans in 9 months, and haven’t reached out to your servicer, then you will end up defaulting on your student loans.

There are serious consequences to defaulting:

  • Some loan holders will require your entire balance to be paid in full. This includes the principal and the interest.
  • You become ineligible for deferment, forbearance, or any repayment programs.
  • You become ineligible for further federal student aid.
  • Your wages can be garnished, plus your tax return can be held to repay your loans.
  • Your credit score will be damaged.
  • You might end up responsible for more than just your loan balance if there are late fees, collection fees, or court fees involved.

These all sound a little scary, don’t they? While defaulting on federal student loans shouldn’t be taken casually, there are ways to improve your situation.

Options for Getting Your Loans Out of Default

In order to get your loans out of default status, you have to make a plan. The unfortunate part is that you have significantly less options than you would in delinquency, and the options you do have require you to be able to make payments.

MyEdDebt.com is a great resource for those looking for more information on getting their loans out of default. The site is run by the Department of Education and highlights its Rehabilitation Program as an option for getting loans out of default.


Going through a rehabilitation program is your best chance at redemption. Upon successfully completing the program, all the negative consequences of defaulting will be reversed. That even includes the damage to your credit score (the default will be erased).

Successful completion involves making 9 monthly payments out of 10 months, so it’s important that you can make the payments according to the plan you’re given. You have to make the payments monthly; lump-sum payments or extra payments will not speed up the process.

A debt collector creates your repayment plan during rehabilitation. They’re supposed to work with you to create a manageable repayment plan, though some of them have wrongfully tried to get borrowers to pay back more than they can afford.

[3 Steps to Handle Being Mistreated by a Student Loan Servicer]

StudentLoanBorrowerAssistance.org has highlighted the importance of paying back only what you can reasonably afford, as a new system was put into place this past July. Under this system, the amount you must pay should coincide with what you would be paying under the Income Based Repayment formula. For “not new borrowers” this is generally 15 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount. For “new borrowers”, it’s 10 percent of discretionary income.

New borrowers are defined by:

“… (1) no outstanding balance on a Direct Loan or FFEL program loan as of October 1, 2007 or has no outstanding balance on a Direct Loan or FFEL program loan when you obtain a new loan on or after October 1, 2007, and (2) received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or student Direct PLUS Loan on or after October 1, 2011, or received a Direct Consolidation Loan based on an application received on or after October 1, 2011. However, you are not considered a new borrower if the Direct Consolidation Loan you receive repays loans that would make you ineligible under part (1) of this definition.”StudentLoans.gov.

[Read more about repayment plans and student loan forgiveness here.]

Once you’ve gone through the rehabilitation program, a lender must purchase your loans in order for them to enter back into standard repayment status. Likewise, only after a lender has purchased your loans will the collection agency ask the credit bureaus to clear your credit report of the default.

Just note that you may only go through the rehabilitation program once. If your loans fall back into default, then you won’t be eligible for the program.

What About Defaulting on Private Student Loans?

Private student loans are a different beast. There’s no delinquency period associated with private loans; as soon as you miss a payment, your loans have defaulted.

Unfortunately, private loans don’t offer the same protection as federal loans do. Therefore, the repayment options associated with federal loans don’t apply for private loans.

Even worse, there aren’t any rehabilitation programs to go through for private loans, unless your lender offers such a program. It’s worth it to ask!

For instance, Discover will report your loan as late to credit bureaus during its monthly account audit, so there isn’t necessarily a time frame to consider. If you missed a payment that was due on the 10th, and their audit is on the 20th, it might take some time to be reported as late. At that time, your loan is also considered to be in default. The good news is that there are no fees associated with their loans, even late fees, which is reflected on their student loans page.

Wells Fargo reports a loan as late after 30 days have passed, and their standard late fee is $28, though this largely depends on the type of loan you have.

For Citizen’s Bank, private student loans are serviced through Firstmark. Their loans are reported as late after being 30 days past due (from the last business day of the month). The loan is considered defaulted after 120 days past due, and late fees (5% of the borrowed amount) are incurred after the loan is 15 days past due.

According to Sallie Mae, depending on the type of loan you have, you’re considered to have defaulted after 6 to 9 months of no payments.

Fortunately, there are some private lenders coming around to the fact that borrowers need help. Wells Fargo is one private lender willing to lend a hand. If you’re having trouble making payments, they offer additional repayment options, and they also have a new loan modification program which can lower your payments temporarily or permanently.

Sallie Mae offers borrowers interest-only payments on certain loans, and they also offer a graduated repayment option on their Smart Option Student Loan.

Discover also offers deferment options to those serving in the military, in public service jobs, or in a residency program.

All lenders encourage borrowers to call if they’re having trouble making payments under their current repayment terms. But you should work under the assumption that once you’re 30 days late it will show up on your credit report, which can stay there for seven years.

The Consumer Financial Protection Bureau has attempted to strip away some of the uncertainty and confusion surrounding student loans, but according to a recent report, the industry remains unchanged. More and more complaints are being received concerning private loans, as borrowers claim they don’t have enough information about the options they have.

The CFPB is encouraging borrowers to use a template that they have available for download to try and negotiate a repayment plan with their lenders. This should be done as soon as you miss a payment, as your private lender will sell your loan to a collection agency after enough time has passed without a payment. They will be more willing to help you than a collection agency will.

As a last resort, you may be able to get your private student loans discharged in bankruptcy. Private loans are slightly easier to get discharged than federal loans. If you’d like to read more about that process, StudentLoanBorrowerAssistance.org has a comprehensive write-up on it.

Final Recap

You want to avoid defaulting on your student loans at all costs, so if you’re delinquent on your loans, get in touch with your loan servicer to figure out the best way to bring your account current. If you’ve already defaulted, check with your loan holder to see if you can enter into a rehabilitation program. If you have private student loans, contact your lender immediately to find out if you can negotiate more manageable repayment terms. These options are available to help you, and there is no shame in taking advantage of them.

Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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