The U.S. Department of Education (ED) monitors the default rate for federal student loans by calculating a three-year “cohort default rate,” which is the percentage of borrowers whose loans entered repayment within the last three years and are now well past delinquent status into default. Although the three-year cohort default rate is an improvement over the two-year rate ED had been using previously, it obviously omits everyone who’s in default but entered repayment a long time ago. Last August, though, the Consumer Financial Protection Bureau (CFPB) issued a report showing that in fact a total 19 percent of borrowers (4.4 million) from the older guaranteed loan program have defaulted on their student loans. By contrast, 8 percent of federal direct student loan borrowers (2.1 million) have defaulted on their loans. Adding in private loans, a total of 7 million Americans have defaulted on their student loans.
These are high default rates, and income-sensitive repayment plans are unavailable to federal loans borrowers in default. For debtors in or facing such dire circumstances, the question becomes what kind of collection powers do debt collectors have for federal and private loans have and how do they differ? There are five differences:
Defining “default”: How the loan defines “default” has a crucial impact on when a debt collector can start demanding loan payments. For federal loans, default occurs after 270 days of nonpayment; for private loans the definition depends on the lender. It can be one missed payment, not keeping it informed of changes of address, or even when the debtor files bankruptcy.
Statute of limitations: These are laws on the books that bar debt collectors from enforcing payment if too much time has elapsed. For private loans, the statute of limitations is set by the state law that applies to the loan agreement. Federally guaranteed or direct student loans have no statute of limitations.
Wage garnishment: Private student lenders can garnish a debtor’s wages by going through the same process that it would for any other kind of debt: file a lawsuit for breach of contract and demand garnishment as a remedy. Federal loans are a bit different: The government sends debtors a notice that gives them the opportunity to request a hearing. Unless the debtor is somehow successful at the hearing, the government can garnish the debtor’s wages without filing a lawsuit.
Loan Consolidation: Federal loans can be consolidated once for each loan, but no law obligates private lenders to offer consolidation as an option. Occasionally, other lenders might be willing to oblige, like credit unions.
Benefits and Tax Refunds: The federal government can deny debtors tax refunds and other government benefits; private lenders cannot do these things.
It’s not necessarily easier to default on a federal student loan versus a private student loan, but for those who are nearing default it’s necessary to explore how bankruptcy can help, such as suspending collection proceedings via the automatic stay or freeing income by discharging other debts.
For answers to more questions about student loans bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy automatic stay Bruce Weiner for a free initial consultation.
