The University of Texas-Pan American Default Prevention Department provides information to students who may be at risk of defaulting on their loans. Its purpose is to give advice on how to avoid default, educate students on the consequences of default, and help former students get out of default. To contact the Default Prevention Department, please call (956) 665-2411.
The borrower is responsible for repaying the student loan(s) even if he/she does not graduate, has trouble finding a job after graduation, or is not satisfied with the education received. If no payments are made on the student loan for 270 days and special arrangements are not made with the lender to get a deferment or forbearance, the loans will go into default. Defaulting on student loans has serious consequences.
Note that student loans are now generally not dischargeable through bankruptcy.
Almost three-quarters of students who default on their loans have done so after withdrawing from school and failing to complete their studies.
Students must understand their options and responsibilities before taking out a loan.
Students should make their payments on time.
They must notify their lender, servicer, or UTPA promptly of any changes that may affect the repayment of their loan. If there is a change in address, the student is responsible for letting them know. Likewise, the lender, servicer must be informed of any name changes (e.g., because of marriage), graduation or termination of studies, leave of absence and transfers to another school.
In the case of financial difficulties, the student should consider applying for a deferment or forbearance on the loans. It is better to defer payments than to go into default. The lender can answer questions regarding these options while the borrower is still making payments, before defaulting on a loan. Deferment or forbearance is not available after a default.
If a borrower is having trouble making payments, the lender may be able to suggest alternate repayment options, such as graduated repayment, income sensitive repayment and income contingent repayment.
The borrower can also consider using a consolidation loan to combine all the educational loans into one big loan. This allows for payments to be sent to just one lender. Furthermore, it MAY possible to extend the term of the loan in order to reduce the size of your monthly payments.
Keep careful records. Put copies of all letters, canceled checks, promissory notes, notices of disbursement and other forms in a file folder.
Finally, the borrower should not to be afraid to contact the UTPA Default Prevention Department for help. The department works with people every day on helping them avoid default. It can suggest different solutions. The department can provide forms, and can provide a list of lenders for students that have borrowed from more than one lending institution.
There are two options available for postponing repayment of student loans - deferments and forbearances. If the borrower is thinking about defaulting on student loans, ask the lender whether you are eligible for a deferment or forbearance before you default. You cannot receive a deferment or forbearance if your loan is in default. If you default on your loans, you are no longer eligible for deferments and forbearances.
During deferment, the lender allows the borrower to postpone repaying the principal of the loan for a specific period of time. Most federal loan programs allow former students to defer their loans while they are in school at least half time. For Perkins Loans and Subsidized Stafford Loans, no interest accrues during the deferment period because the federal government pays the interest. For other loan programs, such as the unsubsidized Stafford loan, the interest still accrues during the deferment period.
Deferments are commonly granted for:
- students who are enrolled at least half-time in an undergraduate or graduate program,
- disabled students who are participating in a rehabilitation training program,
- or economic hardship
Other deferments may also be available; the lender can be contacted for details.
Deferments are not granted automatically. An application must be submitted and documentation must be provided to support the request. Payments on the student loan should not be stopped until after being notified that the deferment has been granted. If continuing at UTPA, the student must submit an In-School Deferment Form to the Default Prevention Department at the Office of Student Financial Services. Payments will not automatically be deferred once the student is enrolled. A Verification of Enrollment is sent to the lending institution(s) after the borrower has submitted the form to the department.
Forbearance allows postponement or a reduction in payments, but the interest charges continue to accrue. The federal government does not pay the interest charges on a loan during forbearance. Interest charges during the forbearance period are the responsibility of the borrower. Forbearances are typically granted in 12-month intervals for up to three years.
Forbearances are not granted automatically. An application and documentation to support your request for a deferment must be submitted. Forbearances are granted at the lender's discretion, usually in cases of extreme financial hardship or other unusual circumstances when the borrower does not qualify for a deferment. Payments on the student loan should not be stopped until after being notified that the forbearance has been granted.
CONSEQUENCES OF DEFAULT
If a borrower defaults on a student loan:
- loans may be turned over to a collection agency.
- borrower will be liable for the costs associated with collecting of the loan, including court costs and attorney fees.
- can be sued for the entire amount of the loan.
- wages may be garnished. (Federal regulations limit the amount that may be garnished to 10% of the borrower's take-home pay.)
- federal and state income tax refunds may be intercepted.
- federal government may withhold part of Social Security benefit payments. (The US Supreme Court upheld the government's ability to collect defaulted student loans in this manner without a statute of limitations in Lockhart v US (04-881, December 2005).)
- defaulted loans appear on credit record, making it difficult to obtain an auto loan, mortgage, or even credit cards. A bad credit record can also affect the ability to find a job.
- borrower won't receive any more federal financial aid until the loan is paid in full or arrangements have been made to repay what is already owed and the borrower has made at least six consecutive, on-time, monthly payments. (Borrower will also be ineligible for assistance under most federal benefit programs.)
- Borrower will be ineligible for deferments.
- Federal interest benefits will be denied.
- Borrower will not be able to renew a professional license held.
- And of course, borrower will still owe the full amount of the loan.
GETTING OUT OF DEFAULT
To get out of default, arrangements must be made with the servicer or lender to repay the loan. Once six regular payments have been made, the borrower will be eligible for additional Title IV aid. After twelve regular payments and the borrower has applied for and received "rehabilitation", the borrower will no longer be considered in default. At this time record of the default will be removed from the reports to credit reporting bureaus.
The Default Prevention Department can provide the names, addresses and telephone numbers of lenders for help and advice about repayment problems.
When in default on student loans, the lender or guarantor may use a collection agency to collect the loan. The collection agency's costs are added to the amount due, and the borrower is required to repay them in addition to the amount due on the loan.
Federal regulations state that a borrower who has defaulted on his or her student loans may be required to pay reasonable collection costs in addition to other charges, such as late payment fees. What constitutes reasonable is not very well defined.
Federal regulations concerning campus-based loan programs, such as the Perkins Loan, suggest that collection costs may not reasonably exceed 30% of the principal, interest and late charges collected on the loan, plus any court costs, for first collection efforts. For second collection efforts, the percentage increases to 40%. For Perkins loans made from 1981 through 1986, many promissory notes limited collection costs to 25% of the outstanding principal and interest due on the loan. Since then, however, promissory notes have not had such restriction.
For loans held by the US Department of Education (e.g., Federal Direct Stafford Loans), the department assesses collection costs at a rate of 25%.
When consolidating a defaulted loan, collection costs of up to 18.5% of the outstanding principal and interest may be included in the amount consolidated. A collection agency might be willing to reduce its fees to 18.5% if the student consolidates his or her loans, but the collection agency is under no obligation to do so. If the student consolidates his or her loans and the collection agency does not reduce its fees, the student must pay the amount in excess of 18.5%.
If a payment schedule is made within 60 days of default, some collection agencies will waive or reduce the collection fee.
Overall, it appears that collection costs can legally be as high as 40%, perhaps even higher.
If the borrower believes the collection costs are excessive, the borrower should ask the collection agency to provide a detailed itemization of the actual costs incurred in collecting the loan. Although federal regulations are murky on this point, it appears that the costs must be based on either the actual costs incurred in collecting the loan or the average costs incurred for similar actions taken to collect loans in similar stages of delinquency.
The US Department of Education Debt Collection Service publishes a guide called Guide to Defaulted Student Loans to help students repay their defaulted student loans.