Susan Tompor: Student loan defaults may get pricier

The fees – which could be as high as 16% – started creating buzz in mid-March after a policy revision was issued by the U.S. Department of Education. It’s yet another reminder of why borrowers should do all that’s possible to avoid defaulting on student loans.

Ever since , agencies that collect on defaulted debt were forbidden by the Obama administration from tacking on a hefty fee if students began repaying within 60 days of a default. Those who defaulted and rehabilitated after 60 days were still subject to the fee.

But under the Trump administrations’s revised policy, even students who begin repaying loans quickly after a default could be charged the fee.

“With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury,” said Rohit Chopra, senior fellow at the Consumer Federation of America and the former student loan ombudsman at the federal Consumer Financial Protection Bureau.

The Consumer Federation of America’s research indicates that 42.4 million consumers owed $1.3 trillion in federal student loans at the end of 2016. About $137.4 billion was in default – a 14% increase from 2015 – including federal loans that defaulted in previous years.

The collection fee applies to loans taken out from banks and other institutions under the Federal Family Education Loan Program, which has not issued new loans since .

“This change by the Trump administration financially benefits guarantee agencies, while hurting defaulted student loan borrowers,” said Mark Kantrowitz, publisher and vice president of strategy for Cappex.

The National Council of Higher Education Resources, which represents some guarantee agencies, declined comment earlier on how the extra fee might be applied. But on Thursday afternoon, the group said guaranty agencies are continuing their practice of not accessing collection costs on borrowers who enter into a rehabilitation agreement within 60 days of default and then honor that agreement.

On the plus side, the Great Lakes Affiliated Group Guaranty Agencies – which includes the Great Lakes Higher Education Guaranty Corporation, United Student Aid Funds, and Northwest Education Loan Association – said Tuesday that it will continue not assessing collection costs on borrowers who agree to rehabilitate their loans within 60 days of default.

College grads and others who are unable to make payments on certain student loans could find it even tougher to dig out of debt now that it’s possible to be hit with double-digit collection fees

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There are legitimate reasons for why some students struggle making their student loan payments. But dragging your feet is not the way to go. If you default, you will be subject to collection charges, wage garnishment and the government can seize your income tax refund. Some better options exist, including income-driven repayment plans where you avoid default.

A default is not something that happens in a split second. For the Federal Family Education Loan Program it takes a minimum of nine months – or 270 days – of nonpayment for a borrower to face default. After that time, lenders have up to 90 days to file such a claim and most lenders will wait until the end of the claim period, Kantrowitz said.

“A single payment is all it takes to prevent the loans from going into default,” Kantrowitz said. “That avoids the need to rehabilitate the loans and be subject to the collection charges.”

Some in the industry question the process of how that fee was banned in the first place. The 2015 action was in response to a lawsuit from a borrower who defaulted but started repaying the loans and then was hit by collection fees.

In January, the former loan guarantor USA Funds agreed to pay $23 million to settle the class action lawsuit that challenged the right of such agencies to collect fees if borrowers started repaying soon after default as part of a loan rehabilitation effort. No wrongdoing was admitted. If approved by the court, the settlement would apply to about 35,000 borrowers – after legal fees and other costs.

Many students borrow money, don’t finish college and find they cannot afford paying the loans. Some students don’t keep track of their loans or pay attention to what loans they have and then fall behind on payments.

Yet many borrowers online payday loans Texas no credit check can obtain more affordable monthly payments for federal student loans by seeking an income-driven repayment plan. See .

To be sure, another hurdle now is making it more cumbersome to apply for federal student loans and those income-driven repayment plans.

You will also put a dent in your credit score

The IRS notes online that it temporarily suspended the tool after concerns that identity thieves could tap into the tool to access information that could be used to file fake tax returns and steal federal tax refund cash from the U.S. Treasury. The retrieval tool makes it easy to shift income-tax data onto a federal form for student aid and applications for the income-driven repayment plan.

So those who are applying for student loans or seeking an income-driven repayment plan will need to manually provide their tax return information.

A federal income-driven repayment plan will reduce your monthly payment to take into account your income and family size. You’ll stretch out 20 years or 25 years, depending on the plan.

It’s important to talk to a lender as soon as you run into financial problems. Short-term options, such as deferment and forbearance plans, exist under certain circumstances to temporarily postpone making payments or reduce payments. You might be able to apply for a deferment, for example, if you are jobless or unable to find full-time employment.

Many people do not find it easy to juggle college debt in the first few years after graduating – or quitting school. But defaulting only hurts your financial future even more.