How Student Loans Work From Start to Finish

Student loans are a way to pay for higher education. Whether you love debt or you hate it, student loans are an investment in your future. They can make an education possible when there is no other way. This page covers the basics of student loans and points you towards additional resources.

Student loans are unique because they have some special features. You often get an attractive interest rate, and almost any student can borrow some money – regardless of income or credit history. Student loans offered through government programs tend to be the most attractive.

• Advantages of Federal Student Loans
• Private Student Loan Basics - Compare to Government Loan Programs

To get a student loan, your first step is to fill out the Free Application for Federal Student Aid (FAFSA). You should submit your FAFSA as soon as possible – you can make estimates and correct the details later. Once you’ve completed your FAFSA, you’ll want to visit your school’s student aid office. Ask what kind of aid you might expect.

• What is the FAFSA?

So that you’re prepared, familiarize yourself with some of the most common student loans:

• Perkins Loans should be a first choice because of their low interest rate
• Stafford Loans are easy to qualify for, and the interest charges may be subsidized for some time
• PLUS Loans allow parents to borrow very large dollar amounts so that you can cover all your costs

You can postpone repayment of your loans under a variety of conditions. This is called a deferment. While you’re in school, for example, you may qualify for an in-school deferment. When you’re in a tough financial spot you can often temporarily stop paying back your loans without any penalty or damage to your credit.

• How Deferments Work

After you’ve finished your education, expect to pay those loans back. Most often your lender will set up an amortizing repayment schedule. If you’ve taken several loans over the years, you may want to consider consolidating your loans. Student loan consolidation has some unique benefits that you can’t find in any other type of loan.

 

What Are Your Options When Your Student Loans Go to Collection Agencies?

If you stop paying a private student loan, your lender will almost certainly turn your delinquent account over to a collection agency. The federal government, although endowed with greater debt recovery options than any private lender, also uses collection agencies when collecting unpaid education loans. You have several options to choose from should a collection agency contact you about your defaulted student loan.

1. Pay In Full

   • Regardless of whether you owe a private or federal student loan, your debt remains valid until you pay it in full. Because student loans carry interest charges, the Fair Debt Collection Practices Act allows collection agencies to continue adding interest and fees to the account the longer it remains unpaid. Your best option, if you can afford to do so, is to pay off the student loan in full. Even if you cannot afford to pay off the entire balance at once, contacting the collection agency and negotiating affordable monthly payments help you avoid more aggressive collection activity, such as a lawsuit.
     

   Settle the Debt

   • One of the primary tools in a collection agency's arsenal is the ability to offer consumers debt settlement programs. A settlement program allows you to pay off the defaulted debt for less than the total balance you owe. The U.S. government typically refuses debt settlement offers on federal student loans because of its ability to force you to pay through garnishment and intercepting your tax refunds. Private student loans, however, do not possess the same collection powers as the federal government, and a collection agency representing a private lender will often be more open to a settlement offer. Even though you cannot settle a federal student loan, you can request that the collection agency eliminate excess fees and interest charges.
     

   Dispute the Loan

   • In certain situations, you can dispute your responsibility for repayment and have your student loans discharged. Each private lender has its own requirements for a liability discharge that should be stipulated within your original loan contract. Even if a collection agency is responsible for your loan, you can contact the U.S. Department of Education directly and dispute your responsibility for repayment of a federal student loan. The federal government will discharge your liability if you never applied for the loan, you suffered a permanent disability or your school closed before you were able to obtain your degree.
     

   File for Bankruptcy

   • Contrary to common belief, bankruptcy is an option for some individuals when faced with a defaulted student loan in collections. If you can prove that making payments to the collection agency would deprive you of a minimal standard of living and that your financial circumstances are not likely to change, you can file an undue hardship petition with the court. The bankruptcy judge is ultimately responsible for deciding whether or not your financial distress is severe enough to merit discharging your student loans through bankruptcy.
     

Deciding to expand my life after college in another country was a big decision and one that has challenged me financially and intellectually. As I packed up and left the good old U.S. of A. for law school on the other side of the pond (where lawyers sometimes wear wigs), I attempted to put my plethora of federal student loans into in-school deference or forbearance. Five separate enterprises own a piece of my undergraduate education totaling $50,000 at the time. Four of the companies put my loans into various types of in-school and hardship forbearance. The one that wouldn’t budge, however, was my Alma matter holding tight to my $3,000 Perkins loan and those $43.23 per month payments.

When a Student Loan Goes to Collections

Not only did I not have an extra $43.23 per month at that time but I didn’t even know how to transfer money from London to Boston in any way that didn’t attract at least $50 in fees. My deferments kept getting denied until the loan ended up in collections. If you’re familiar with a certain type of person from South Boston (think of the movie The Departed) and combine that with the evils of a third-party collections company, you can imagine those phone calls. They told me that they didn’t care where I was in law school; I needed to pay. And by the way, the loan had doubled in size, and I now needed to pay $6,000. Yesterday.
I used every skill they’d taught me in law school to refuse to speak to “Mark Wallburg Collections Co.” and instead spent Christmas break 2007 on the phone in a screaming match with the head of loan collections at my former college. According to him (but not the other four student loan companies), the fact that I went to a law school overseas prohibited me from getting an in-school deferment period. Furthermore, since I wasn’t paying U.S. taxes as an overseas student, I couldn’t prove that I was economically unable to pay. So, tough luck. Pay $6,000. Now.

How I Fought Back

I then used the public relations skills that I had learned at an internship (set up through that very university) to draft a press release outlining the way I had been treated and the various federal loan reporting laws they had broken. I went through old contacts and planned to send copies to everyone and anyone I could think of in Boston. I figured if it was a slow news day, the Boston Globe might pick it up as an interest piece. They love stories of how the Colleges in Boston screw over students.
But first, I showed my masterpiece to Head of Collections at my college and magically, my loan was put into in-school deferment—retroactively—and all charges and interest over the past year were removed. Sadly, it remains the most profitable piece of writing I’ve done yet (approximate value: $3,000)!

Repaying the Loan

When I finally started working as a lawyer and trying to change the path of my financial life through my blog Savings Not Shoes, I added the loan to the list of debts and it’s currently top of my list getting payments of between $500 and $1,000 per month. “Knee-Breaking Collections” is still on my credit report, which is annoying, but doesn’t really affect me as I am totally anti-debt these days.

You’ll imagine my surprise my college’s alumni association approached me and asked me to lead a new U.K. Alumni Club. It was finally time to try and make up for Christmas ’07. I told the association that I would have been privileged to lead their overseas chapter in the U.K., if only I’d been treated with decency by the college’s student loans office when setting up my life over here, so I’d have to decline.

Now the alumni association has brought new life into my old tale of collections and woe. My goal is that it doesn’t happen to other students who perhaps didn’t learn as much in college—like writing press releases and having contacts on the Boston City Council.

Their veracity has impressed me enough to stop by when I’m in Boston at the end of the month and to go out to lunch with the alumni association. More importantly, I’m swinging by the loan office and giving them the remainder of the payoff amount for my loan…in person, and with a smile.