There are two basic kinds of student loan consolidation. There is private student loan consolidation and federal student loan consolidation. Federal student loans usually can be consolidated at a much lower interest rate than you could get for an unsecured private school loan. The reason is federal student loans are as the name suggests backed by the federal government. This means that if you can not pay back the money lent to you, the federal government guarantees the loan and will repay it to the lending institution.

This does not mean that you should not plan on paying back you school loans, because unless you die or become disabled, the lending institution has the obligation to try and collect. If you do not repay your student loans the lending institution will take steps to report your student loans as defaulted and turn the loan over to your stats guaranty agency. Once in default the status will be reported to the credit bureaus and it will have an inverse effect on your credit. Also, most lending institutions will hire a collection agency to collect the debt. Your loan holder may “accelerate” a defaulted loan, which means that the entire balance of the loan (principal and interest) becomes due in a single payment. Once your loan is assigned to a guaranty agency or the U.S. Department of Education (Department) for collection, the following steps may be taken to recover the outstanding balance due:

• The U.S. Treasury may offset your Federal and/or State payments to repay your defaulted loan, which means, the U.S. Treasury is going to try and collect your student loan debt.
  
• You may have to pay additional collection costs after your loan is assigned to a private collection agency for collection, which means you are going to owe more money.
  
• Also, you may be subject to Administrative Wage Garnishment, whereby the Department will require your employer to forward 15% of your disposable pay toward repayment of your loan. You should note that wage garnishment is used only for borrowers who refuse to voluntarily repay their defaulted loan and is not used with those borrowers who continue to make regular and timely monthly payments.
  
• Federal employees face the possibility of having 15% of their disposable pay offset by the Department toward repayment of their loan through the Federal Employee Salary Offset Program.
  
• The Department may take legal action to force you to repay the loan. The Department and guaranty agencies also pursue recovery of defaulted student loan debts through litigation. If you refuse to voluntarily repay your student loan, you may be sued in State or Federal District Court for the outstanding balance plus attorney’s fees and court costs.
  
• Finally, credit bureaus may be notified, and your credit rating will suffer.

Once a loan is declared in default, you are no longer entitled to any deferments or forbearances. In addition, you may not receive any additional Title IV federal student aid if you are in default on any Title IV student loan until you have made payments of an approved amount for at least six consecutive months, but could be a lot longer.

The worst part of default is you lose the ability to do any kind of student loan consolidation until you have gone through a rehabilitation program. This rehabilitation program can last anywhere from 9 to 15 months depending on the lender.

For student loans authorized under Section 435(i)Title IV of the Higher Education Act, default occurs on a Federal Family Educational Loan (FFEL) program loan after a default has persisted for 270 days in the case of a loan repayable in monthly installments or 330 days in the case of a loan repayable in less frequent installments.

Federal student loans include Perkins loans, Stafford loans both federal family education loans and William D. Ford direct loans, and parent plus loans.

peter@studentfinancialadvisors.com
www.studentfinancialadvisors.com