Sunday, September 9, 2012

A Schedule for Student Loan Default

Graduation Day

- 24:00 hours:

Upon graduation, student loans in fall into a six month grace period during which students do not need to make payments nor do loans accrue interest. And 24% of people who are older than 25 who are college graduates, this period is a time to celebrate as it is something achieved by a relatively small portion of the populace

Only 8.9% get a masters degree.

3% a professional or doctorate degree.
Top notch.

- 6 months:

There is something called capitalized interest on student loans. Most interest of this nature is reserved as fees for loans that have become delinquent. However, it can also be applied to loans that have been in a period of deferment, like the one you took out for school, that you didn’t have to make payments on while you were in school. 

That is another misunderstanding many people have about student loans. Though they do not accrue interest at the same rate they will during repayment, the loans were not free while students are taking classes.

capitalized interest rate on loans is a portion of what you would have paid if interest had been collecting during that 4-year period and it will add a few thousand dollars to the price of the loan, depending on your repayment plan. Students who chose to make payments on the loan while in school will ultimately end up paying less for the interest and the loan. However, most students choose not to pay loans while in school as payments would have been about $50-100.

- 3 Months:

After 90 days, student loans can begin to go in a couple of directions.

Option 1: Payments are made on time
Payments are made on time.

Option 2: Payments are not made on time
After 90 consecutive days of failing to make monthly loan payments, loans will be considered delinquent and all major credit agencies will be contacted. 
The hit suffered by students' credit scores will have some very negative consequences in their future and, in a lot of ways, their immediate surroundings.

Unfortunately, the percentage of loans becoming delinquent and falling into default is on the rise. In a recent sample of 3.6 million students, 8.8% of a defaulted after just two years after exiting school.  This is up from 7% in 2008 and works out to the tune of 320,000 students.

- 9 Months:

After 270 days, there are still, really, only two options.

Option 1: Payments are made on time
Paids are made on time.

Option 2:  Payments are not made
This is the point at which student loan default actually begins. At this point, things start to get pretty complicated and there are some pretty severe results that come as a result. For example:

  • leases, mortgages and auto loans will not be an option
  • credit cards and cell phone plans will not be an option
  • protecting wages from being garnished, should the IRS pinpoint a place of employment, will not be an option
  • the IRS can seize funds from your accounts and getting it back will not be an option

In order to track down this information the names of those who default on their loans are turned over to federal agencies and those agencies will hire private law firms in order to track and find these people. Those law firms that will have feeds to be paid as will late fees and interest that accrued while those in default were on the run

If Default Goes Forever

For American students, student loan debt is very hard to absolve short of full payment as discharging them during bankruptcy is very rare and only comes as a result of “undue hardship”, an ambiguous term for a hardship that is proved by concrete evidence and stands out among all other hardships. However, for most people student loan discharge hasn’t been and won’t be possible since the mid-1970s when laws regarding the practice were changed.

So a lot of students faced with payments that can be as $1,000 a month which is nearly 50% of the average American's monthly salary of $31,410. 

These high payments have turned a lot of students in boomerang kids.

But isn't being a boomerang kid a good thing? I mean, it sounds like it could be fun.

Wrong. It describes the 53% of kids aged 18-24 have delayed adulthood and live with their parents because they can’t quite get their careers going. The economy is poor. And it doesn’t get much better once kids have turned 25, 41% of 21-29 year olds are still at home.

Becoming a boomerang is a very real possibility for graduates today and a reality many don’t want to face; however, it is one best faced ahead of time because loan counseling and aid programs may be able to help. 

For more information about loan counseling, check out these great resources:

          SALT Student Loan Counseling : a financial empowerment program for students
Department of Education Student Loan Forgiveness - a government page about forgiveness

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