Collections
Definition
Collections, in the context of defaulted student loans, refer to the process of pursuing overdue loan payments from borrowers who have failed to meet their repayment obligations.
Detailed Explanation
When a student loan goes into default, it triggers a series of actions known as collections. This process is a concerted effort by lenders, loan servicers, or collection agencies to recover the funds that are past due. Collections for defaulted student loans can involve various strategies ranging from communication attempts to legal actions.
Initially, collections might start with phone calls, emails, or letters to the borrower, reminding them of their overdue payments and discussing possible repayment options. If these initial attempts do not yield results, more stringent measures may be taken. These can include reporting the default to credit bureaus, which negatively impacts the borrower's credit score, making it difficult for them to obtain future credit, mortgages, or even employment in some cases.
In more severe situations, collections can lead to wage garnishment, where a portion of the borrower's salary is deducted automatically to pay off the debt. Tax refunds and government benefits can also be intercepted. In some cases, the collection agency may sue the borrower, leading to potential legal judgments against them.
It's important to note that the collection process for federal student loans can be different from private student loans, with federal loans offering more standardized and regulated collection practices.
Example
John Doe, a graduate, has missed 270 days of of payments on his federal student loan. As a result, his loan has gone into default.
He begins receiving calls and letters from a collections agency contracted by the federal government, informing him about his defaulted status and the need to arrange a repayment plan. When he does not respond, the agency moves forward with wage garnishment, where a part of his paycheck is automatically directed towards his loan repayment.
Key Articles Related To Collections
Related Terms
- Credit Bureau: An organization that collects and compiles individual credit histories, including loan repayment records, and provides this information to lenders and other entities.
- Default: The failure to repay a loan according to the terms agreed upon in the promissory note, typically after missing multiple payments.
- Loan Servicer: A company that manages student loans, handling billing, repayment options, and customer service on behalf of the lender. See the full list of student loan servicers here.
- Repayment Plan: An arrangement between the borrower and lender to pay back a loan, which can include different terms like lower payments or extended duration based on the borrower's financial situation.
- Wage Garnishment: A legal process where a portion of a person's earnings is withheld by their employer for the payment of a debt, such as a defaulted student loan.
FAQs
- What happens when a student loan goes into collections? The borrower faces increased communication from the lender or a collection agency, negative credit reporting, potential legal action, wage garnishment, and interception of tax refunds.
- When do federal student loans go to collections? The borrower is in default on a federal student loan after failing to make full payments for 270 days.
- How can one avoid collections on a student loan? Borrowers can avoid collections by making timely payments, contacting the loan servicer for assistance if they're facing financial hardships, and exploring options like loan deferment or forbearance.
- Can collections be stopped once they start? Collections can be stopped by negotiating a repayment plan, consolidating loans, or, in some cases, through loan rehabilitation programs.
- Does consolidation or rehabilitation remove the default status of a loan? Yes, loan consolidation or successful completion of a rehabilitation program can remove the default status from a student loan.
Editor: Colin Graves Reviewed by: Chris Muller
