STUDENT LOAN COLLECTIONS
In recent years, the Department of Education has significantly increased its efforts to lower student loan default rates and collect defaulted student loans. In Fiscal Year 2000, the government collected over $4 billion on defaulted loans through a variety of collection methods, including:
- $920 million by offsetting federal income tax refunds and other federal offsets;
- Nearly $107 million through wage garnishment of defaulters;
- Nearly $2 billion by consolidating defaulted loans; and
- Almost $1.5 billion through other collection tools, including third-party private collection agencies.
In comparison, the Department of Education collected only about $2.4 billion in FY 1995.
The growth in student loan recoveries can be attributed in large part to legislative changes giving student loan collectors enhanced collection powers. These powerful student loan collection tools, combined with aggressive government enforcement, make it increasingly difficult for even the lowest-income borrowers to ignore student loan debt.
DEFAULT VS. DELINQUENCY
Borrowers are in default on Federal Family Education Loans (FFEL) or Direct Loans if they fail to make required payments for 270 days for loans repayable in monthly installments. Fortunately, the nine month period is a relatively long time for borrowers to seek alternatives to default such as more affordable repayment plans, deferment, and/or forbearance. During the nine month period, the borrower is merely delinquent and not in default. This is an important distinction because as long as the borrower is not in default, he/she is still eligible for deferments and for flexible pre-default repayment options.
During the first forty-five days after default, agencies are required to send a written notice to the borrower stating that the agency will either initiate garnishment procedures or a civil suit. In addition, the agency must attempt to contact the borrower by telephone.
During the period from 46-180 days after default, the agency is required to make at least two attempts to contact the borrower by telephone and to send at least three written notices.
After 181 days, the agency is required under most circumstances to begin tax refund offsets and federal benefits offsets if available. In addition, administrative wage garnishment must begin by the 225th day after default.
FINDING OUT WHO IS COLLECTING ON THE LOAN
Defaulted loans may be held by the Department of Education, by a state guaranty agency, or by the school. The Department and state guaranty agencies also contract with private collection agencies to administer many of their collection responsibilities.
A good place for borrowers to start is the federal student aid information center, 1-800-4-FED-AID (800-433-3243). The information center staff should be able to give borrowers the address and telephone number of the agency holding a defaulted loan.
Borrowers with Direct Loans should contact the Direct Loan Servicing Center at 1-(800) 848-0979. The number for information about Department held loans is 1(800) 621-3115. More information is also available on the Department's web site at http://www.ed.gov.
CONSEQUENCES OF DEFAULT
Statute of Limitations Generally Eliminated
The Higher Education Technical Amendments of 1991 (HEA) eliminated all statutes of limitations for any collection action by a school, guaranty agency, or the United States under a federal loan program. These amendments also eliminated all limitation periods for tax intercepts, wage garnishments, and other collection efforts.
Reporting of Student Defaults to Credit Bureaus
The Higher Education Technical Amendments of 1991 (HEA) requires that guaranty agencies, lenders, and the Secretary of Education regularly exchange information with credit reporting agencies about outstanding student loans. Before a default may be reported, the student must be given notice that, unless the borrower enters into a repayment agreement, the information will be disclosed to a reporting agency.
The HEA sets out special rules as to when reports on student loans become obsolete. With the notable exception of Perkins Loans, reports for most student loan defaults may be included in consumer reports for seven years from the later of three dates:
1. When the Secretary or guaranty agency pays a claim to the loan holder on the guaranty;
2. When the Secretary, guaranty agency, lender, or any other loan holder first reported the account to the consumer reporting agency; or
3. If a borrower re-enters repayment after defaulting on a loan, from the date the student subsequently goes into default again on the loan.
Due to a change in the 1998 HEA, Perkins Loans, in contrast, may be reported indefinitely.
How Tax Refund Interceptions Work
The tax refund intercept program involves a blanket seizure of almost all tax refunds due to debtors who are in default on their student loans. There is no statute of limitations for such an offset.
Whether the debt is owed the Department or the guarantor, the decision of which refunds to intercept is not done on an individual basis. Computer tapes of all students in default meeting certain general criteria are sent to the IRS and anyone on that list owed a refund will have that refund intercepted.
The Higher Education Act administrative wage garnishment statute and regulations allow garnishment of up to ten percent of "disposable pay". Disposable pay is defined as gross pay less withholding taxes and other amounts required by law to be deducted (such as the total amount garnished by other creditors).
DISCHARGING STUDENT LOANS IN BANKRUPTCY
A chapter 7 or 13 discharge eliminates all of a debtor's unsecured debts, with certain statutory exceptions. While student loans are unsecured debts subject to discharge, the Bankruptcy Code restricts whether most types of student loans can be discharged in either a chapter 7 or chapter 13 bankruptcy. These educational loans can only be discharged if the consumer can show that payment of the debt "will impose an undue hardship on the debtor and the debtor's dependents." Recent amendments to the Bankruptcy Code have made it more difficult to discharge student loans.
Notice: Information provided by the National Consumer Law Center.
Student Loan Law. 2001.