5 Ways Federal and Private Student Loan Creditors’ Collection Powers Differ

Many people considering filing a Las Vegas bankruptcy are student debtors who have defaulted, or are about to default, on their loans. Now, no one knows the actual default rate for student loans. Many of them are held by the Department of Education, which only publishes the two-year (soon three-year) “cohort default rate,” which refers to the number of defaults over that period.

The problem is that any loans that default outside the cohort range aren’t counted. The actual default rate could be significantly higher, up to 40 percent by some estimates. That’s a lot of defaults, but for those facing the consequences of a default, it’s important to know what powers student loan creditors do and do not have.

The primary issue is the differences between federally guaranteed student loan creditors’ collection powers and those of private student loan creditors.

(1)  Federal student loans have no statute of limitations, but private student loans’ will be based on the state law under which they operate and whatever the loan agreement says.

(2)  Both types of loans define defaults differently. For the federal government, defaults occur after 270 days of nonpayment. Private lenders can define default however they wish, which often means one missed payment, and possibly not providing a new address or even filing bankruptcy.

(3)  The federal government allows loan consolidation once for each loan. Private lenders are not required to allow debtors to consolidate or refinance their loans.

(4)  Concerning wage garnishment, for federal loans, the lender must send the debtor a notice that gives the debtor an opportunity to request a hearing. The lender does not have to file a lawsuit against the debtor. For private student loan creditors, garnishment works just like any other loan under state law. The creditor must file a lawsuit and win before obtaining a garnishment as a remedy.

(5)  Finally, the creditors who own federally guaranteed loans can deny debtors government benefits and tax refunds. Private student loan creditors cannot do these things.

Student loan defaults are a serious issue, and their near-nondischargeability in bankruptcy makes them especially dangerous to fall behind on. It’s important to know that filing bankruptcy can suspend collection proceedings and possibly help reduce your payments on other debts.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 702-880-5554 to set up your free consultation.

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