Recovering unpaid student loans is a systematic process. Just like mortgage recoveries, the steps can vary depending on the jurisdiction and the terms of the loan. Here’s a general outline of the process:
- Review Loan Agreement: Go through the loan agreement to ensure you are familiar with its terms and conditions, especially those regarding default and recovery.
- Contact the Borrower: Reach out to the borrower to remind them of the missed payments and to discuss possible solutions.
- Send Formal Notices: If initial contact doesn’t resolve the issue, send formal notices outlining the amount due and the necessary steps the borrower must take to avoid further consequences.
- Offer Alternative Repayment Plans: Sometimes borrowers may be facing financial hardship. In such cases, it’s often beneficial to work with them to modify the repayment terms or offer an income-driven repayment plan.
- Report to Credit Bureaus: Report the delinquency to credit bureaus. This usually happens automatically after a certain number of days of missed payments (e.g. 90 days). This can affect the borrower’s credit score.
- Accelerate the Loan: Depending on the loan terms, you may have the right to demand that the full balance of the loan be paid immediately since the borrower has broken the terms of the loan agreement.
- Employ a Collection Agency: If the borrower is unresponsive or unwilling to pay, employ the services of a collection agency. The agency will then take over the task of contacting the borrower and attempting to collect on the debt.
- Wage Garnishment: In some cases, especially with federal student loans in the United States, the lender or collection agency can get an administrative garnishment order which allows them to take a certain percentage of the borrower’s wages directly from their employer.
- Offset Tax Refunds and Government Benefits: For federal student loans in the U.S., the Department of Education may use the Treasury Offset Program to seize federal tax refunds or other government benefits to repay the debt.
- Legal Action: If the above steps are unsuccessful, the lender may choose to file a lawsuit against the borrower. If the court rules in favor of the lender, they can use various means to collect the debt, including bank levies or property liens.
- Monitor for Changes in Borrower’s Financial Status: In some cases, it might not be possible to recover the unpaid loan immediately due to the borrower’s financial situation. It’s important to periodically review and monitor the borrower’s financial status for any changes that might enable recovery.
- Closure or Write-off: Eventually, if the debt is deemed uncollectible, it might be written off as a bad debt. However, this doesn’t mean the borrower is relieved of the obligation; the debt still exists, but the lender has decided not to actively pursue collection.
Note that throughout this process, lenders must abide by the laws and regulations governing debt collection in their jurisdiction. In the United States, for example, the Fair Debt Collection Practices Act places restrictions on the methods that can be used to collect debts.