student loans

6 sneaky ways students land in loan trouble

My debt isn't substantially decreasing
My debt isn't substantially decreasing © Karen Roach -

According to the Department of Education, once a loan goes into default, whoever holds the loan -- whether it be the federal government or a private lender -- can demand the entire loan balance immediately. If you can't pay it, the loan can go to a collections agency where it becomes harder to pay off.

"When you default on the loan, 20 percent of every payment will be deducted for collection charges," says Kantrowitz. "It's only the remaining 80 percent that will be applied to the new interest that accrues, as well as the principal balance of the loan."

If you can't pay collections charges on your federal student loan, the government and other loan holders can pull up to 15 percent of your disposable income from your paycheck and withhold money from your federal income tax refund or Social Security checks.

Borrowers with loans in default can get out by paying off the loan in full, taking out a consolidation loan, or, more likely, entering a loan rehabilitation program in which you and the lender "agree on a reasonable and affordable payment plan," reports the Department of Education.


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