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How to Help Borrowers with Unpaid College Debts and Defaulted Student Loans

Comments Off on How to Help Borrowers with Unpaid College Debts and Defaulted Student Loans 17 November 2016


Students sometimes encounter roadblocks because they owe money to a college or have defaulted on their student loans. Low-income students are more likely to be affected by these problems. These tips will help counselors help them overcome these obstacles.

Problem: Colleges may legally refuse to provide official transcripts to students who owe a debt to the college. This can prevent the student from transferring to another college to continue their education. But, the student can’t afford to repay the debt until they graduate and get a good job. Or, the student may need financial aid to pay off the debt.

Solution: A counselor can help the student by advocating on their behalf with the college. Maybe the student can finish their degree at the original college, with just a little more financial support. Maybe the college can accept a payment plan instead of payment in full, and release the transcripts after the student has made a few consecutive monthly payments. Maybe the counselor can convince the new college to conditionally accept unofficial transcripts and let the student enroll with a promise to deliver official transcripts later. Colleges may be more willing to compromise when a counselor intercedes on behalf of the student. (Counselors should get the student to sign a FERPA waiver so that the college can discuss the situation with the counselor.)

Problem: The student wants to repay his or her student loans, but circumstances have overtaken them. By the time the student loan bill is due, they’ve already spent their paycheck.

Solution: Sometimes, students just have trouble managing their money. Ask them to track their spending for a month using a program like Quicken or Mint.com. Increasing awareness of how they spend their money is the first step in exercising restraint. It will also help them plan for their bills. Encourage them to enroll in auto-debit, where the monthly student loan payment is automatically transferred from their bank account to the lender. Not only will this help ensure that they make the payments on time, but many lenders offer a slight interest rate reduction as an incentive. Asking the lender to change the due date to a few days after they receive their pay check may also help. These problems can also be prevented by providing students with access to financial literacy mini-courses while they are still in school.

Problem: The student is getting harassed by collection agencies. They are afraid to open their mail or answer the phone. They need someone to help them figure out a way out of this mess.

Solution: Avoiding the problem will only make it worse. The simplest solution is to talk to the lender and ask about their options. If they are actively engaging with the lender, the flood of letters and calls will stop. They can also exercise their rights under the Fair Debt Collection Practices Act (FDCPA) to tell the lender to stop contacting them, which will end most of the calls and letters, except for notices about specific actions the lender is taking, such as filing a lawsuit. But, this will not address the underlying problem, which is the difficulty dealing with the debt. There are options for dealing with financial difficulty, such as suspending or reducing the monthly loan payments, and for rehabilitating defaulted student loans.

Problem: The student doesn’t know the status of his or her student loans, just that it is bad.

Solution: The problem might not be as bad as the student thinks. If the student is just a few months delinquent, as opposed to being in default, making a few payments might be all that is necessary to bring the account current. Start by compiling a list of the loans and the lenders. If the student doesn’t remember any of these details, have them login to the National Student Loan Data Systems (NSLDS) to check on the status of the federal loans. Information about private student loans, as well as federal loans, may be found in the student’s credit reports, which may be obtained for free at www.annualcreditreport.com. Then, have the student call the lenders to learn about their options.

Problem: The student wants to continue their education, but has learned that they are ineligible for further federal student aid because they are in default on a previous federal student loan.

Solution: Borrowers can regain eligibility for federal student aid by rehabilitating the defaulted student loans. There are two main methods. One is to make 6 consecutive, full, voluntary, on-time payments on the defaulted student loan. The other is to consolidate the loans into a Federal Direct Consolidation Loan and agree to repay the consolidation loan with an income-driven repayment plan. This is a one-time opportunity, so if they redefault, they will have no choice other than to pay off the debt in full.

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