Educate Yourself: Student Loan Basics
Due to the confusing manner in which the U.S. Student loan system is designed, administered, and presented to the citizens, most people can't answer the most basic questions about them. This knowledge disadvantage is frustrating, and puts us at a huge disadvantage when dealing with lenders, guarantors, and collection companies who will not hesitate to use it against the borrowers at great cost.
The following are basic, key concepts unique to student loans that you need to grasp so you can both understand and speak intelligently about your loans. Read and understand the following before going on. Take your time.
There are two basic types of student loans: Federal, and Private.Federal Loans(such as Stafford, PLUS, GradPlus, Parent Plus, GSL, Perkins, NDSL, and Direct Loans) are all either guaranteed against default by the federal government, or lent directly by the federal government. The interest rate is set by law for these loans, and typically varies between 2-9%. Importantly: Federal loans may have been made by private companies like Sallie Mae, Nelnet, or even made by the schools (like Perkins Loans) Note: Even though these are given out by private entities, these are still federal loans because of the government guarantee. Many people mistakenly think that they have private loans because they received them from a private company, when in fact their loans are federal loans!
Private Loans are not guaranteed by the federal government, interest rates are usually higher than for federal loans, are usually advertised as “quick and easy”, and often require a cosigner. You may have a mix of federal and private loans, and they may have been given by the same private company, such as Sallie Mae, Citibank, Wells Fargo, etc.!! Make sure you understand this distinction, and that you understand what types of loans you have.
When a Federal loan defaults
When a federal loan defaults (not including Direct Loans and Perkin's Loans), the original lender sells the loan to a middleman "guarantor", and is paid between 95-100% of the principal and interest of the loan at the time it defaulted. The guarantor is usually a state sponsored, non-profit organization, such as Edfund, Edsouth, USA Group or others. The guarantor will typically use a third party collection company, such as GRC, ACS, Premiere Credit, Pioneer Credit, Arrow Financial, or others. The guarantor and its collection company can and will take roughly 20 cents out of every dollar that you repay- off the top- before applying anything to interest and principal on the defaulted loan. Moreover, it is often the case that the collection company used will be owned by the original lender- a clear conflict of interest, but this is the reality.
Ultimately, your loan may be transfered to the Department of Education for collection. Federal law permits the guarantors, collection companies, and the Department of Education vast powers for the collection of defaulted federal student loans. This includes wage and tax return garnishment, Social Security and Disability income garnishment (without a court order), termination from public employment, suspension of professional licenses, denial of security clearances, and others. Moreover, federal loans have no statute of limitations associated with them, are exempt from truth in lending laws, and guarantors are typically exempt from Fair Debt Collection practice regulations (this does not apply to third party collection companies, however).
Importantly, Federal loans are almost always impossible to discharge through bankruptcy*, have no statute of limitations, are exempt from Truth in Lending requirements, state usury laws, and even Fair Debt Collection Practices are not applicable to the state and public agencies that guarantor these loans. There are various repayment programs and deferment options for these loans, but these are fraught with risk, and can potentially be very harmful to borrowers. Do not enter into any repayment plans without knowing the risks. See Finaid.Org for more, here.
When a Private loan defaults:
Private loans are not guaranteed by the federal government (notwithstanding recently announed bailout programs for the student loan industry). Really, they are equivalent to a credit card, a bank line of credit, or any other type of loan between private parties...with one MAJOR difference (explained below). There are a myriad of procedures used for delinquent private loans.
As with federal loans,sometimes there is a third-party guarantor for private loans (TERI, for instance is a private loan guarantor). Check with your lender to find out if your private loans have a guarantor, and learn more about collection procedures, interest rate variability, fees (which can be horrendous), etc.
As of October, 2005, private loans were made equivalent to federal loans with regards to bankruptcy discharge. That this was even attempted by the student loan industry was unthinkable...after all, why should a non-federally guaranteed loan of any kind be specifically exempted from bankruptcy protections? This is akin to taking bankruptcy protections away from credit cards! The answer is that there really is no good answer*. However, standard consumer protections, such as truth in lending requirements, statutes of limitations, etc. do apply to private loans, so the borrower does have at least some consumer protections for private loans. Forebearances, and deferments, however, are typically more difficult to get for private loans. Some companies, such as Sallie Mae are even requiring that students begin loan repayments for private loans while still in school!
You should now be able to tell the difference between private, and federal loans. Are yours federal? Are they private? Or do you have both types? Find this out at a minimum, before attempting to negotiate with your lender.