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FAQ ABOUT STUDENT LOANS, DEFAULT AND YOUR CREDIT

Difficulties paying your student loans? The Ombudsman works with student loan borrowers to informally resolve loan disputes and problems. Their goal is to facilitate and provide creative options/alternatives for borrowers needing assistance with the following federal loans:

• Direct Loans—Subsidized and Unsubsidized Direct Student Loans, Direct PLUS Loans (for parents), and Direct Consolidation Loans;

• Federal Family Education Loans—Subsidized and Unsubsidized Stafford Loans, FFEL PLUS Loans (for parents), and FFEL Consolidation Loans;

• Guaranteed Student Loans, SLS Loans; and

• Perkins Loans.

Student loan debt is enormous in the U.S according to HRSA. Total Default Loans $161,771,165 (as of 8/15/03, as amended by additions and deletions). You begin your journey to grab an MBA or degree but few realize the financial distress that lies ahead. Student loans are generally federally insured and have no statute of limitations. The statute of limitations is the "tolling of time" to collect a debt. Government loans including student loans are not subject to that provision. Additionally, student loans may no longer be included in a bankruptcy proceeding except in certain circumstances wherein the court approves it.

Bankruptcy: Nondischargeable Debts: Student Loans
A student loan is generally a Nondischargeable debt. In other words, you will still be responsible for paying the loan even if you receive a discharge of debts in a bankruptcy proceeding. There is one exception, however, that may allow a borrower to discharge his or her student loan(s). If the denial of a discharge of the educational loan would impose a hardship on the debtor and his or her dependent, then the educational loan may be dischargeable. This exception is sometimes invoked by students who have borrowed heavily for college or trade school only to find that they do not have the earning power to pay back the loans. To determine whether the undue hardship exception should apply, the bankruptcy court will generally require the debtor to show the following: Based on current income and expenses, the debtor cannot maintain a "minimal" standard of living for him- or herself if forced to repay the loan. This minimal standard is usually defined by the local poverty line.

-The conditions creating the undue hardship are unlikely to improve significantly during the repayment period or in the foreseeable future.

-The debtor has made honest, good faith efforts to repay the loan.

-The debtor has made a good faith effort to maximize income and minimize expenses.

If the debtor satisfies each of these conditions, the undue hardship exception should apply. However, ultimately the decision is at the discretion of the bankruptcy court, and in most cases, the undue hardship standard is a difficult one to satisfy.

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Delinquency
Delinquency of student loans is an enormous problem for both the lenders and the consumer. Delinquent student loans are at an all time high and lenders make it tough to escape and student's are mostly unaware of their options. Since most student loans are not authorized to be included in a bankruptcy, the debt will remain owed. There is little escape from the loan except in a few circumstances like disability, death or improper certification. When a person defaults on a student loan, a guaranty agency immediately charges 18.5% for collection costs. The guaranty agency pays a collection agency 2.5% - 3% to collect on the defaulted loan.  When a person enters loan consolidation on a defaulted or delinquent loan, the guaranty agency collects that 18.5% on the new note. 20 U.S.C. 1091 requires that the defaulting borrower be charged "reasonable collection costs."

There are at least 57 guaranty agencies and millions of people paid that 18.5%. If your debt lies with a collection agency or guarantee agency, it's wise to try and work out a repayment with the original lender. There is no reason you should have to deal with a guarantee agency unless the original lender refuses to take the loan back. If they do, they no longer have to pay the collection agency so it's in their best interest to collect their own debt. If they feel you will not be a hard case to collect, they may just pull the loan back at your request.

Generally speaking any original creditor like a student loan lender is not covered by the Fair Debt Collection Practices Act. Only third parties to the debt are. Third parties include attorney's attempting to collect and collection agents. Student lenders can attempt a judgment entry on you without ever having to serve you. But what about your right to fair trial? Well, the one thing they must do before they sue you is attempt to notify you of the evidence against you. The flaw in this seems to be that many have moved and the attempt was made, therefore you may be a judgment debtor without knowing it! Students can hold some of the blame but not intentional blame. A young adult may not understand the full scope of the debts. While in college not only do they incur necessary student loans but many amass a lot of credit card debt. Once they graduate they find the resources are not available to pay everything.

So what do you do?
Your best option with student loans is to work out a refiguring of the loan if possible, to bring it current or have a rehabilitation started. Through rehab, deferment, transfers and consolidation, you do have several choices. Contact your ombudsman, lender or school to find out what options you have with your loans. There are different programs for different loans such as FFEL, Government Student Loans, William Ford and several others.

DETERMINING WHO HAS YOUR DEFAULTED LOAN
Be sure to check the collection notices that you have been receiving to determine which agency holds your defaulted loan. Additionally, you may call the Federal Student Aid Information Center at 1-800-433-3243 (1-800-4-FED-AID) to determine who holds your loan. Also, if your loan is a William D. Ford Federal Direct Student Loan, please contact the Direct Loan Servicing Center. This agency is the best source of information about this type of loan. Many defaulted FFEL program loans are held by a guaranty agency, rather than the U.S. Department of Education. If your loan is held by a guaranty agency, that agency is the best source of information about your loan.

Similarly, if your defaulted Perkins Loan is still held by your college, you should contact the college for more information. However, if your defaulted loan is held by the Department, please read on to find out how you can resolve the default status of your loan. Federal Family Education Loans (FFEL), which include Federal Stafford and Federal PLUS loans. When placed in default, these loans are first assigned to a guaranty agency (an organization that administers the FFEL Program for your state) for collection.

Periodically, guaranty agencies assign loans to the Department for collection. Direct Loans. Federal Stafford and PLUS loans are also offered through the William D. Ford Direct Loan Program. When placed in default, these loans are assigned to the Department's Debt Collection Service. Federal Perkins Loans When placed in default, Perkins Loans may remain with the school or be assigned to the Department for collection.

Update Dec 2005: -Collecting student loan debts from retired people legal? It is now. In a recent Supreme Court decision (The student loan case is Lockhart v. U.S., 04-881.) , the court ruled that it is legal to collect student loan debts from seniors. See this link for story> http://seattletimes.nwsource.com/html/nationworld/2002670090_webscotusloans07.html

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