Federal Student Aid Program Loans
You can obtain federal loans to pay for schooling. The Federal Student Aid Program is strict about loan repayment for Direct Stafford, Perkins or Direct Plus loans. You qualify for these loans if you have limited income through your parents, or qualify because your own income meets a certain criteria. Unlike federal grants, you must repay these types of loans.
You may qualify for a private loan depending on the institution you attend. These loan types have strict repayment criteria. Sallie Mae is the largest private loan provider; however, banks typically offer loans to students as well. Defaulting can lead to the same problems as federal loans. Private loan holders generally consider one miss payment as late or delinquent. If you miss nine consecutive payments, you default.
Defaulted federal and private loans result in the loan holder, school or bank to:
- Call your home and mail notices as attempt to collect on defaulted loans.
- Send your loans to collections. Collections attempts to obtain payment arrangements or any type of payment from you. The loan holder adds collection fees to the amount owed on the loans.
- Report all defaulted loans to one or more credit agencies. This action may prevent you from obtaining credit from other parties. For example, a car loan or credit card denies your application.
- File for wage garnishment through a court of law.
- Obtain the right to intercept your income tax return as long as it takes to satisfy the loan(s).
- Take away lower interest rate options on your loans.
- Prevent you from applying for forbearance and deferment of the loans.
- Prevent you from applying for income-sensitive and other repayment options.
- Block you from getting other educational loans.
Preventing Defaulted Loans
Avoid problems like these by applying for a forbearance or deferment before the first late payment. Forbearance allows you to stop or lower your monthly loan payments due to hardship for several months to a year. When you do begin payments, they can be higher due to interest fees accrued while in forbearance.
Deferment options allow you to postpone payments for up to one year. With deferment, loans like Stafford, do not accrue interest. Other loans may add interest each month and you are responsible for this after deferment. With forbearance and deferment options, you can pay the interest every month if you can afford the low payments. Your loan holder does not penalize you if you stop paying on the interest.
Income-sensitive, income-based and several other options also help you when you cannot repay full monthly payments. These options lower your monthly payment based on your yearly income and family size. All options, including forbearance and deferment, can prevent defaulting on your loans.
Stephen Moore is a writer at privatestudentloan.org.