Student loans have become a more significant concern in terms of the financial burden it places on many consumers in the United States. Together, borrowers today owe more than $1. 5 trillion in student loans and more and more people are falling behind on their payments and becoming delinquent on their loans. This leads to another question – do student loan defaulters lose their home or other property to debt collectors?
The short answer is maybe, but not directly. The government and private lenders cannot repossess or put a foreclosure on your home if you fail to pay your student loans. However, there are some indirect approaches that could potentially lead to the loss of your home through default.
Federal Student Loans
Federal guidelines if you default on federal student loans state that the federal government cannot repossess your home or any other property. Federal student loans have other ways of handling defaults like, the income controllable repayment plan, the deferment options and forbearance. Government and its debt collectors can take your wages, refunds, and benefits but they are prohibited to take your property.
Although federal student loans are non-dischargeable in bankruptcy, the failure to pay them affects your credit rating and for this reason, you may find it hard to secure a loan or mortgage. The default will appear on a credit report and affect your credit rating for up to 7 years. Any normal lender would not want to lend money to a person with a poor credit score and a history of defaulting on loans. Therefore, although you cannot lose your home to a federal student loan default, the credit score decrease will hamper home buying plans.
Private Student Loans
In the case of private student loans, the lenders can be more forceful when it comes to collections. Unlike federal student loans, private student loans are not as forgiving when it comes to repayment and default options; lenders may take legal action against defaulters to recover the loan.
While private lenders cannot put a direct claim on your house if you fail to meet your obligation on a student loan, they can get a court judgment against you and then use other ways to recover the monies they are legally entitled to. For instance, they could try to garnish your wages or freeze your bank account. In some cases, they may be able to place a legal claim to or sell other less necessary assets, such as vehicles or boats.
It also affects credit and as with the federal loans, it poses an implicit threat to your mortgage and home purchasing prospects.
Consumer Protections
Fortunately, there are also some measures of protection for student loan defaulters as the methods of debt collection and litigation used for other kinds of debt may be rather aggressive.
For instance, the recent amendments reduced the period of time for collecting on private student loans to 6 years. In the case of litigation, the lender or any debt collector who wants to sue the defaulter must do so within 6 years of default or else the borrower cannot be sued again for the same debt.
Furthermore, federal law also shields particular classes of debts from being discharged in the bankruptcy court and student loan debt is not an exception. In the case of federal and private student loans, it is nearly impossible to discharge these loans in bankruptcy without passing through an adversarial proceeding and proving undue hardship.
There are also some laws of the state that give some exemptions whereby some things such as homes cannot be taken when one is filing for bankruptcy. In some of the states, there are wild card exemptions, homestead exempitions, or you can protect the equity in your home in bankruptcy to a certain extent. These can help offer extra security to your home in case you file for bankruptcy as a result of the challenges that come with repaying student loans.
Strategies for Avoiding Default
The only way to ensure that student loans do not pose a problem in the future is by ensuring that students do not default. Consider these strategies for managing loans:Consider these strategies for managing loans:
Take up income contingent repayments - Nowadays, federal and many private lenders offer income contingent repayments where by your monthly installments are determined by your income. They can be limited to 10-20% of which the individual has discretion over after paying for basic needs.
Consider deferment or forbearance, if applicable – Federal loans can be deferred for up to 3 years at a time if the borrower is returning to school, unemployed or facing some sort of economic hardship. It is also important to note that many of the private lenders also provide forbearance as one of the possibilities.
Think about consolidation or refinancing – If you have several federal or private student loans, combining all of them into a new loan with more favorable terms might be possible through consolidation or refinancing. The only thing you need to watch out for is if the loan term is longer than necessary or if the total interest is higher.
Check out student loan forgiveness programs – Depending on one’s job, such as working for a government or non-profit organization, or teaching in a low-income school, one may be eligible for having federal student loans erased after making payments for 10 years under such programs as the Public Service Loan Forgiveness.
Conclusion
In conclusion, it is understood that defaulting on student loans is not a good business if it can be helped. Although, lenders cannot physically take your home or belongings, defaulting has severe effects on the credit status and slows down potential homeownership or other financial objectives. Income contingent payments, deferment in certain situations, and loan consolidation or refinancing can prevent the loans from leading to a downward spiral to default. However, if you decide to default anyway, let them know that they still have flexibility and your home is safe. Concentrate on the recovering loans and the reconstruction of credit to help you get a fresh start financially.
