What You Need To Know About Borrowing For Your Education
You spent a lot of time researching which college you wanted to attend and which program of study you wanted to pursue. Part of choosing where you will go to school depends on what type of financial aid package the school can offer you. In most cases, you will have to take out a loan of some sort, usually federal and more frequently private alternative loans. You realize that the time you spend deciding where to go to school and what to study is part of an investment in your future. Unfortunately, a lot of times, you’re not taught about the impact that borrowing to pay for education can have on your future as well.
The following information is intended as counseling material designed to help you understand what you need to know about borrowing for your education.
Awareness Is The First Step
By the time you’ve been approved for a loan, you are so happy to know you’ll be able to attend the school of your dreams that the last thing on your mind is what impact repaying this loan will have on your future. Understanding the basics about your loan can help. You should know the amounts of all education loans, the interest rates and fees associated with taking out these loans, repayment options, as well as deferment and forbearance eligibility and consolidation procedures.
Communication With The Loan Holder Is Vital
You should always be aware of who is holding your loan. Before the loan goes into repayment, a guaranty agency, secondary market or the lender may be holding the loan. In most cases, a loan servicer is the holder of the loan. The loan servicer should be contacted in the case of a name or address change, billing statement or repayment questions, and to request deferment or forbearance. Keeping in touch with the loan servicer can prevent future problems with late payments or default, which may affect your credit report.
Late Payments
Not making a loan payment on time can result in a late charge penalty. Late charges are added to the principal and interest owed. When students fall very far behind on their payments, a collection agency or attorney may be obtained to collect the money owed. Students will have to pay any charges associated with collection activity.
Forbearance
If the borrower is unable to make regular principal and interest payments, the lender may accept interest-only payments or the student may be able to defer payments with a capitalized interest forbearance. The student should always contact their servicer to find out about forbearance on all their loans. A forbearance may be granted at the lender’s discretion, but only in accordance with the guidelines. The student should contact the lender or the designated servicer immediately if they would like to obtain forbearance. If at any time during the repayment period a student is unable to make a required payment, they should immediately contact the servicer to seek advice on obtaining a temporary cessation of payments. A forbearance will grant an extension of the principal and interest of the loan.
To prevent default, forbearance may be granted for a minimum of one month up to six months. A forbearance may be extended if the student reapplies for it, but total forbearance granted may not exceed 12 months during the repayment period.
How Default Happens
Default happens most often when people cannot meet their monthly payments due to unemployment, under employment, or bankruptcy. Even under these circumstances, the obligation to repay the loan remains. And interest will continue to accrue on the outstanding loan balance. If the loan is in default for many months or years, the accrued interest will greatly enlarge the borrower’s total debt.
As stated in the standard form promissory note, there are a number of events that constitute default on the loan. Basically, the term “default” means a failure to make monthly principal and/or interest payments on a loan as required under the terms and conditions of the promissory note. The lender or its designated servicer will attempt to collect the loan from the borrower and coborrower in accordance with the following standards:
15 days past due:
- Send late notice. If no late notice sent, phone call to borrower and coborrower(s) or letter if phone calls do not result in contact.
30 days past due:
- Phone call to borrower and coborrower(s) or letter if phone calls do not result in contact with the borrower and coborrower(s). Contact references by phone for valid address if unknown.
45 days past due:
- Phone call to borrower and coborrower(s) or letter if phone calls do not restult in contact with the borrower and coborrower(s).
60 days past due:
- Phone call to borrower and coborrower(s) or letter if phone calls do not result in contact with borrower and coborrower(s).
75 days past due:
- Phone call to borrower and coborrower(s) or letter if phone calls do not result in contact with the borrower and coborrower(s).
120 days past due:
- Send final demand letter to borrower and coborrower(s). A claim will be submitted by the lender prior to the 180th day of delinquency.
When a loan goes into default, the guaranty agency, as the insurer of the loan, reimburses the lender and then owns the loan. At that point, the guaranty agency attempts collection of the loan directly from the student.
Consequences Of Default
If the student is delinquent on repayment in excess of 120 days or as laid out in the terms and conditions of the promissory note, the loan is in default. This can happen without the student’s knowledge if the loan holder cannot contact them. When a loan is in default, the following can happen:
- The student may be prevented from getting additional student aid, including grants and student loans.
- All rights to deferments and privileges for forbearance are lost.
- School transcripts may be withheld, preventing the student from being able to transfer to another school or going on to graduate or professional school.
- Tax refunds or bank accounts can and may be seized.
- Property, including a car, may be taken.
- The student may lose professional licenses and opportunities for federal employment.
- Defaults are reported to credit agencies, resulting in damaged credit for up to seven years (may not get credit cards, a car loan, a business loan, or home mortgage).
- Employers may be forced to deduct payments from earnings (garnishment of wages).
- The student may be forced to deal with collection agencies or a lawyer who will seek to recover the money owed.
- The student will be forced to pay all the attorneys’ fees, court costs, penalties and additional interest involved in a default proceedings.
How To Get Out Of Default
The student should stay in touch with their loan holder, which could be the guaranty agency or lender, but most likely the loan servicer. Communicating early; they shouldn’t wait until they’re desperate or they’ve used up their grace periods and deferments. If they show good will and deliver on their promise, the loan holder is likely to work with them through their difficulty.
How To Prevent Default
The simplest way to prevent default is to manage money wisely. Students should:
- Review current and projected income;
- Minimize credit card debt while in school;
- Know what their approximate monthly loan payments will be;
- Send in loan payments when due each month, in the full amount, regardless of whether or not they receive a bill;
- Communicate with their lenders, loan holders, and/or servicers;
- And develop and maintain a realistic personal budget.
Bankruptcy
In the case of a borrower filing bankruptcy, any debt incurred by an individual debtor for an educational loan made under a program funded in whole or in part by a non-profit institution is automatically nondischargeable in a bankruptcy proceeding, unless the loan first became due seven years prior to the filing of the bankruptcy petition, or the borrower proves that an “undue hardship” exists if the loans are not discharged. If there are two names on the promissory note, the lender will continue to invoice the applicant for payment of the loan.
Megan Wilson is a teacher, life strategist, successful entrepreneur, inspirational keynote speaker and founder of https://Ebookscheaper.com. Megan champions a radical rethink of our school systems; she calls on educators to teach both intuition and logic to cultivate creativity and create bold thinkers.
