Unless you deliberately keep them in your file, student loan collections are going to remain on your credit history report for up to seven years. Your loan servicer, not your parents, can remove student loan collections on your report. Consolidation, however, adds the additional collection costs to the original loan balance. So when you leave school, you still qualify for loan forgiveness programs, educational assistance, and even loan repayment options depending on your current income. To learn more about removing student loan debt, register for a free credit report sample from one of the three credit reporting agencies (Experian, Equifax, or TransUnion).
The IRS issues a tax refund when you become delinquent on your federal student loans. Student loan debt that is expected to be collected includes: Perkins, Stafford, Direct, Guaranteed, Medical, Unsubordinated and Special Education. A tax refund is issued based on an IRS computation of the tax liability, which includes the penalties and interest. The IRS accepts the computation of taxable income and the standard deduction for tax liability as the basis for assessing the amount to be awarded a tax refund.
If you are behind in your student loan collections due to a defaulting status, contact the collection agency and state that you will repay the debt as soon as you receive your paycheck. In case of an audit, the agency will ask for verification of your monthly employment and bank account details. The collection agency will then send a notification by mail to the employer or paymaster requesting the payment of the debt. However, if the employer or paymaster does not reimburse, the collection agency can go through the proper legal channels to pursue collection. Once collection agencies have obtained legal rights to proceed with collections, they must provide notice to the debtor of their intent to pursue collection.
Most student loan collections start when borrowers do not make payments on time. Students fall behind because of various reasons, some of which are uncontrollable. They may be studying at a university while taking up tight student loan debts. Or, they may be taking up high-interest loans that make it difficult to make payments regularly. Such loans often come with fixed interest rates until the borrower graduates from college and becomes self-employed. Borrowers also fall behind because of emergency situations such as car troubles, medical bills, or sudden death in the family.
Private student loan collections can either be initiated by the borrower or directed by third parties such as landlords, tax departments, credit bureaus and credit collectors. When borrowers default on their loans, lenders can either take over their defaulted student loan collections or attempt to find a solution by either selling the defaulted loans or providing forbearance. A borrower who wishes to provide forbearance can do so by extending his or her defaulted loan payments for a longer duration. This is referred to as forbearance.
In most cases, a lender will give a grace period of a few months or even a year before instituting collection actions. However, when the grace period lapses and there are no further progress in the repayment of defaulted loans, lenders can file a complaint against the borrower. For instance, a lender can file a complaint in connection with missed payments when a student loan is in deferment status. The complaint will include the date when the defaulted loans were incurred and when they were in deferment status. Furthermore, it will include the due and unpaid balances along with the monthly loan payments and the lender’s contact information. A copy of this document along with a detailed explanation of the case should be given to the borrower.
Private student loan collections can also be initiated by institutions that participate in the Federal Family Education Loan (FFEL) Program. Under the FFEL Program, all participating lenders must participate. Private loans are categorized as non-school loans. Consequently, a lender cannot proceed with a private loan collection unless the borrower has opted for loan forgiveness programs. Loan forgiveness programs allow borrowers to repay their defaulted student loans by crediting their credit reports.
Loan collections can be initiated even when federal loans enter default for short durations of time, such as during the grace period mentioned in the above example. This is because the Statute of Limitations (10 years) on filing federal claims does not begin until the borrower begins to miss payments. Therefore, federal loans entering default do not automatically become student loan collections. Nevertheless, these types of collections are sometimes necessary in order to obtain information with respect to the borrower’s current financial status.