How The Student Loan Collection Process Works

How the Student Loan Collection Process Works

After ending your education, either with or without a degree, the terms of your loan usually require you to begin repaying it. However, you may be entitled to a “grace period” of 3 – 6 months to begin making your payments.
But suppose you don’t begin paying a federally guaranteed student loan. In that case, someone from either the US Department of Education, or one of their agents, such as Navient, Great Lakes, or Nelnet, may contact you. Ostensibly, the purpose of the communication is to establish payment terms.
However, if you indicate that you “can’t afford to pay” your student loan, the standard protocol is to offer to provide you with “deferment.” Deferment is a program provide in the federal student loan system that excuses you from making any repayment for up to three years.
While you can usually obtain deferment for any reason, or indeed, no reason at all, the most common reasons why you may be offered deferment are:

1. You haven’t obtained a job.
2. Although you have a job, it isn’t paying enough.
3. You have medical or other family problems that consume your entire income.
After three years, you might be surprised that the lender makes no real effort to collect the debt. Not unreasonably, you may assume that the debt collection process is ineffective or that they have forgotten about you. In other words, when your deferment ends, the student loan collection process might be relatively low-key. It might lead you to conclude you can simply pay what you can and when you can with little to no consequences.
But this assumption can lead to unsuspecting students like you getting further trapped in a mountain of debt that can be nearly impossible to clear up. In many cases, borrowers take no initiative to repay these student loans. Suppose you, as a borrower, contact the loaning agency for help. In that case, they often recommend solutions that advance their interests rather than yours.
If you really “can’t afford to pay,” deferment is not the right solution for you. It is an expensive trap. So if you can avoid it, do so. More information about why it is the wrong decision and what better options are available are explained on this website.
But assuming you did fall for an offer to defer repaying your loans when your deferment period ends, you should immediately begin repaying these debts. It is best to enroll in an income-based repayment program unless you have high earnings. (Such programs are described later on this website.)
But if you don't begin paying when the deferment ends, after 270 days, federal law declares that your loan is "in default." Even if no one ever asked you to pay or even sent you a statement, a default may occur. Being in default can happen for many reasons, such as:

1. Not finding well-paying employment.
2. An increasingly high cost of living.
3. Ignoring subtle messages asking for payments.
But if you don't begin paying when the deferment ends, after 270 days, federal law declares that your loan is "in default." Even if no one ever asked you to pay or even sent you a statement, a default may occur. Being in default can happen for many reasons, such as:

1. Not finding well-paying employment.
2. An increasingly high cost of living.
3. Ignoring subtle messages asking for payments.

With ordinary credit transactions, such as a credit card or vehicle loan, being in default has several negative consequences. For instance, the creditor may terminate your account, report it to credit bureaus, and make it challenging for you to use credit in the future. However, when a student loan goes into default, the following repercussions occur, and these consequences are authorized by federal law:

Collection Penalty

The student loan company may automatically add a 30% collection penalty to the student loan balance. Consequently, a $30,000 loan has accumulated interest added, amounting to approximately $6,000. Then, the collection penalty increases this loan again, turning it into a monster loan with a balance of $46,800. Isn't that scary?

Federal Benefits Attached

The "intercept" process will automatically take Federal benefits to apply to your student loan. To name a few, it can take tax refunds, stimulus payments, social security, and even federal unemployment benefits to apply toward your student loan debt.

Wage Garnishment.

Without a court order, the student loan company may garnish your wages.

Locked out of Student Loan Assistance Programs

Student loan lenders can prevent you from enrolling in programs to make repaying this debt more affordable (such as income-based repayment) if you are in default.

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