Student Loan Skeleton

CollectionAgency has contacted me advising I owe on a $2500.00 student loan from 1986, right now they want $7,800.00.  They have already received $3,700.00 from taking my federal tax refund.  Do interest and penalties continue to add up for years, or is there a point that it should have stopped?

Sherri

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Hi Sherri,

The bad news is that defaulted student loans have no statute of limitations for enforceability.  Once a loan goes into default, an acceleration clause kicks in and the entire balance becomes due and payable.  This may result in US Treasury withholding payments, collection costs, wage garnishment (10 –15% of disposable pay), and/or legal action.  According to Federal Student Aid, once a defaulted student loan goes to an outside collection agency “the amount needed to satisfy a student loan debt collected by the Department’s contractors will be up to 25 percent more than the principal and interest repaid by the borrower.”

The good news is Loan Rehabilitation Requirements have been loosened.  NCLC Reports (Vol 25, Nov/Dec 2006): “Borrowers now need make only nine on-time payments within a consecutive ten-month period in order to rehabilitate their loans.  Previously, twelve consecutive timely payments were required”.

You are also entitled to “reasonable and affordable” payments under the Higher Education Act.

Hope this helps.

Paul