Higher education is expensive in United States. Student loans are rising and so are the defaults. It is certainly an unfortunate scenario for students, but also for the lenders as they are taking a big financial hit and in some cases, are forced to write-off these loans. Private student loans are primarily issued by the Banks and Credit Unions. After 2008 recession many lenders have cut back on their student loan programs.
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 three months of non-payment. After reaching the default, this debt is usually forwarded to a professional Debt Collection Agency.
A Collection Agency will seek repayment from the borrower and even from the cosigner (or the guarantor). This results in frequent collection letters and collection calls from the agency to the borrower and the cosigner. A collection agency has to follow many debt collection laws like the ones specified in the “Fair Debt Collection Practices Act (FDCPA)”. Upon lender’s request a collection agency may report this debt to the Credit Bureaus, damaging the borrower’s ability to take further loans like mortgage, credit card etc.
Check this: Cost of hiring a debt collection agency
The amount of collection fees can be added to the borrower’s private student loans is set by the promissory note which is signed during the initial processing of the student loan. Sometimes the state law sets a lower limit. The borrower is still responsible for any unpaid interest, late fees and principal, which keeps getting bigger as the time passes by.
It is extremely important to involve a Collection Agency ASAP because as the interest adds up, the amount becomes too big to repay. In such a scenario, the borrower often gives up completely on repaying the loan, ready to face whatever consequences that may follow.
Even if the lender/collection agency gets a court judgment against the borrower or cosigner for wage garnishment, for the private student loans can be only up to 25% of disposable pay in most states. With the court order, a lender/collection agency is sometimes able seize assets, bank accounts and place liens against property owned by the borrower or cosigner. Laws vary a lot from state to state and of course getting a “highly favorable” judgment is understandably hard because the lender, the big guy, is often seen as the bad guy and borrower is sometimes seen as the victim of circumstances.
Collection agencies are experts in collecting debt including the private student loan. They do a far superior job provided the account is transferred early. Another huge disadvantage of waiting in the case of private student loans is that the “Statute of limitations” applies here, and could shield the borrower eventually. Statute of limitations does not apply to Federal loans.
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