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Student Loans

This article explains various types of student loans and gives tips on determining which kind you have.

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Common Terms Used With Student Loan Issues

  • Borrower: Individual who applies for and receives money from a lender.

  • Default: When the borrower fails to pay the loan as promised to the lender.

  • Delinquency: When a borrower does not make a loan payment when payment is due.

  • FAFSA: Free Application for Federal Student Aid, which is used to apply for financial aid for college or graduate school.

  • Lender: Bank, agency, or school that loans money to a borrower.

  • Loan: Money you borrow and must pay back, generally with interest.

  • Origination Date: The date on which the borrower gets the money.

  • Servicer: Whoever is currently handling billing, receiving the borrower’s loan payments, and other services on behalf of the lender.

For more definitions, check out the U.S. Department of Education's Federal Student Aid website's glossary.

 

Types of Loans

There are several types of federal student loans that are currently available.

  • Direct Subsidized Loans are made to eligible students with financial need. The U.S. Department of Education pays the interest on the loan while you are in school at least half-time, for the first six months after you leave school, and during a deferment period (see below for deferment information)

  • Direct Unsubsidized Loans are available to eligible students regardless of financial need. If you borrow an unsubsidized loan, you are responsible for paying all the interest. The loan will generate interest while you are still in school. If you do not pay the interest, it will be capitalized, which means that when your loan becomes due, the interest will be added to the amount of your loan.

  • Direct PLUS Loans are made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid, regardless of financial need. A credit check is required.

  • Direct Consolidation Loans allow borrowers to combine all eligible federal student loans into a single loan with a single loan servicer.

Learn more about the William D. Ford Federal Direct Loan Program.

In addition to the loans listed above, there are other loan programs ended by the Federal government or transferred into one of the above programs. 

  • The Perkins Loan Program provided money for students with exceptional financial need. Perkins Loans used to be called National Direct Student Loans or National Defense Student Loans.  

  • The Federal Family Education Loan Program worked with private lenders to provide education loans guaranteed by the federal government.

Private loans are not part of the Federal Student Aid program and have their own conditions set by the private lender. These loans typically have additional conditions, fewer options for repayments, and higher interest.

 

What kind of loan(s) do I have?

If you do not know the type of loan that you have, take a look at your loan documents. Federal loan promissory notes, applications, and billing statements include the name of the federal loan program at the top of the document.

You can also access the National Student Loan Data System website. This website will display information about your federal loans and grants only. It will not include your private loans. You will need to know your FAFSA ID and password. If you have forgotten, the website provides options to recover your ID username and/password.

 

Repayment

Federal Loans - Generally, once you graduate, drop below half-time enrollment, or leave school, repayment begins on your student loans. Certain types of federal loans have grace periods. In addition, there are different types of repayment plans. Learn more about when you must begin payments and repayment plans.

Private Loans - Read the terms of your loan documents carefully for information about repayment plans, deadlines, and grace periods.

 

What If I Have Trouble Making Payments?

Federal Loans - There are several options to help prevent you from defaulting on your loans:

  • Deferment postpones your payments. There are a variety of circumstances that may qualify you for deferment (e.g., cancer treatment, economic hardship, graduate fellowship, etc.). Depending on the type of loan, interest may accrue during the deferment. Learn more.

  • Income-Based Repayment may lower your payment amount because it is intended to be affordable and based on your income and family size. There are different income-based repayment plans. Learn more.

  • Consolidation may lower your payment amount because you may be able to combine multiple student loans into one loan with a fixed interest rate based on the average of the interest rates being consolidated. Note that your payments may be simplified, but you can lose certain benefits. Learn more.

  • Forgiveness, Cancellation, and Discharge means that you are no longer required to pay some or all of your loans. These options may be available under certain specific programs and circumstances (e.g., public service loan forgiveness, teacher loan forgiveness, closed school discharge, total and permanent disability, death). Learn more.

For Private Loans, contact your lender and ask about any deferment or payment reduction options. Review your loan documents to see if any of these topics are addressed.

 

Delinquency and Default

The first day after you miss a payment, your student loan becomes delinquent (or past due). Your loan account remains delinquent until you pay the past due amount or make other arrangements (e.g., deferment, forbearance, change repayment plans).

  • After 90 days or more, your loan servicer can report your delinquency to the national credit bureaus.

  • If you continue to be delinquent, you risk going into default.

Default means that repayments have not been made for a certain period of time stated in the loan agreement terms.

  • For federal loans, your loan generally goes into default if you fail to make a payment for 270 days, and you have not made arrangements with your loan servicer that would not obligate you to make those payments. Learn more.

  • For private loans, your loan generally goes into default as soon as you miss 3 monthly payments. Review your loan documents carefully for the provisions related to default. Learn more.

There are serious consequences of defaulting on your student loan, including:

  • the entire unpaid balance of the loan, plus interest, may become immediately due;

  • you lose eligibility for deferment, forbearance, and changing repayment plan benefits;

  • your credit record will be damaged;

  • your tax refunds or federal benefit payments may be withheld and applied to repayment of your defaulted loan; and/or

  • your lender may take you to court.

 

Collection Agencies and Wage Garnishment

The lender has a variety of options to pursue if you have defaulted on your loan.

Collection Agencies - If you are in default, your lender may place your loan with a collection agency.

  • A collection agency is not part of the U.S. government. The collection agency may contact you to try to collect. Learn more.

  • When dealing with collection agencies, be on your guard against annoying, confusing, or illegal tactics. Keep track of where your loan came from and who is collecting it. If a collection agency calls you, write down the agency’s name and address, the name and extension of the person you’re talking to, and any other relevant information.

  • You have rights under a federal law called the Fair Debt Collection Practices Act, which makes it illegal for debt collectors to use abusive, unfair, or deceptive practices when collecting debts. If a collection agency violates these rules, you can bring suit against them in federal court. Learn more.

Wage Garnishment - Your loan holder may be able to order your employer to withhold a percentage of your take home pay to collect your debt.

  • Federal Loans - If you have Federal student loans, the government can garnish your wages without a court order. This means that the government will require your employer to turn over a portion of your paycheck before you get it. Up to 15% of your disposable pay (how much you make after taxes and other deductions) can be garnished. The law requires that you receive notice of garnishment at least 30 days before collection begins. Also, if you request a hearing within thirty days of receiving the notice, garnishment cannot start until after the hearing. Learn more.

  • Private Loans - Private lenders must sue and get a judgment against you to garnish your wages. Learn more.

Garnish Federal Benefits - Like wage garnishment, if you have Federal student loans, some federal benefits can be garnished. Pension and some state benefits may also be garnished. The government can also withhold your tax return. This is called an “offset.” The law requires that you be given notice of these collection methods, and you may have defenses against these offsets.

Court - Your lender can take you to court. Private lenders are more likely to sue than the federal government. 

  • For federal loans, there generally is no statute of limitations, meaning that the government has a claim against you for payment of the debt for the rest of your life.

  • For private loans, there is a statute of limitations. In Maryland, a lender generally cannot sue you if 3 years have passed since the debt became due, but there can be exceptions. Also, the statute of limitations can be reset, allowing you to be sued. This may occur if you agree that you owe money or make a small payment. Read your loan documents very carefully.

 

Getting Out of Default

For Federal loans, the two main ways to get out of default is loan rehabilitation or loan consolidation. There are pros and cons to both options.

  • Loan Rehabilitation - To start this process, you will enter into a loan rehabilitation agreement with your lender where you agree, in writing, to make 9 voluntary, reasonable, and affordable monthly payments within 20 days of the due date, and make all 9 payments during a period of 10 consecutive months. Learn more.

  • Loan Consolidation - You may have the option to consolidate a defaulted federal student loan into a new Direct Consolidation Loan by either repaying the new Direct Consolidation Loan under a income-driven repayment plan or making 3 consecutive, voluntary, on-time fully monthly payments on the defaulted loan before you consolidate it. Learn more.

  • The payments made under rehabilitation or consolidation must be voluntary – wage garnishments, tax return offsets, and other payments where your lender or the government takes the money do not count as voluntary payments.

For private student loans, contact your lender to see if they offer similar type of options.

Bankruptcy - Generally, Chapter 7 and Chapter 13 bankruptcy will not get rid of your student loan debt. However, there is an exception for undue hardship, which court rarely allow. Learn more.

Also, you can always repay the defaulted loan, but that is not likely to be an option for most borrowers.

Source
Christopher Sweeney, Maryland Volunteer Lawyers Service; Updated by PLL Contributors
Last Updated:
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