More than 70% of U.S. college graduates take student loans, and unfortunately, a large percentage of these loans go into default. Among them, medical student loans are the most tricky to collect as compared to other types of student loans because they carry higher balances.
Inability to collect the remaining installments even on a few medical student loans results in a loss of hundreds of thousands for the lender. Lenders of private student loans are primarily banks, credit unions and specialized lenders.
Unlike other loans, student loan obligations do not go away even if the borrower files for bankruptcy. A private student loan is considered to be in default after 3 consecutive non-payments (and nine months for loans originating from the U.S. Department of Education or DOE). Even with a court order, the maximum wage garnishment for private student loans can be only up to 25% of disposable pay in most states. Private lenders have lesser options to recover student loans versus loans originating from DOE. DOE has the capacity to target Tax Refunds and other Federal Benefit offsets which private lenders don’t.
Once the account is in default, student loan debt is due immediately, this is called the “acceleration processes“.
After a default, the account is usually forwarded to a student loan collection agency without wasting more time. The recovery rate of student loans is generally not too great. Therefore it is important to forward accounts to a loan collection agency with extensive experience in handling medical student loans. For the federal student loans, a debt collector gets paid nearly $1,700 per borrower who rehabilitates their debt. For private loans (originating from banks and credit unions), collection agencies work on a contingency basis, charging a fee between 20% to 40% depending on how old the debt is and the outstanding loan amount.
Private debt collection agencies use a diplomatic and empathetic approach to collect student loan debt. They must work with consumers to find a solution and offer them multiple repayment options to prevent further falling into the debt trap. Debt collection agencies can contact the cosigner of the student loan if the primary person is unable to pay the debt.
Private student loans are subject to a statute of limitations that may range from 3 to 15 years, depending on the borrower’s state of residence. Federal student loans are not subject to a statute of limitations. This is one of the main reasons why there is such an urgency to collect the student loans issued by a private financial institution.
Repayment plans can last for many years; therefore, there is always a chance that the borrower who rehabilitates their debt, may once again go in default a few years later. After the loan is rehabilitated, the lender may remove the default from the borrower’s credit history as a part of the settlement agreement.
Collection agencies are required to follow the FDCPA rules. The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the behavior and actions of third-party debt collectors who are attempting to collect debts on behalf of another person or entity.
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