Educate Yourself: Student Loan Basics

Utterly confused about your student loans? Can't answer the most basic questions about them? This knowledge disadvantage is frustrating, and puts you at an automatic disadvantage when dealing with lenders, guarantors, and collection companies who will not hesitate to use this against you (often while pretending to be trying to help). There are some concepts unique to student loans that you need to grasp before you can speak intelligently about your loans.

The 10 minutes you spend reading the information below, however, will clear a significant amount of confusion,
allow you to speak in a far more informed manner, and should inspire you to go further, learn more, and join us in the fight to restore consumer protections.

There are two basic types of student loans: Federal, and Private.

Federal Loans(such as Stafford, PLUS, GradPlus, GSL, Perkins, NDSL, and Direct Loans) are guaranteed against default by the Federal Government. The interest rate is set by law for these loans, and typically varies between 2-9%. Importantly: Federal loans are usually taken out through private companies such as Sallie Mae, Nelnet, or Citibank. However, Direct Loans are dispersed directly through the Department of Education. Note: Even though these are federal loans, they are given out by private lenders!. Many people confused that private companies make federal loans.

Private Loans are not guaranteed by the federal government, interest rates are usually higher than for federal loans,
are usually advertised as “quick and easy”, and often require a cosignor. Private loans may be guaranteed by a third
private guarantor, such as TERI, but not by the federal government. You may have a mix of federal and private loans, and they may have been given by the same private company, such as Sallie Mae, Citibank, Wells Fargo, etc.!! Make sure you understand this distinction, and that you understand what types of loans you have.

When a Federal loan defaults.

When a federal loan defaults (not including Direct Loans), the original lender sells the loan to a middleman
"guarantor", and is paid between 95-100% of the principal and interest of the loan at the time it defaulted. The
guarantor is usually a state sponsored, non-profit organization, such as Edfund, Edsouth, or others. The guarantor
will typically use a third party collection company, such as GRC, ACS, Premiere Credit, Pioneer Credit, Arrow
Financial, or others. The guarantor and its collection company can and will take roughly 20 cents out of every
dollar that you repay- off the top- before applying anything to interest and principal on the defaulted loan. Moreover, it is often the case that the collection company used will be owned by the original lender- a clear conflict of interest, but this is the reality.

Ultimately, your loan may be transfered to the Department of Education for collection. Federal law permits the guarantors, collection companies, and the Department of Education vast powers for the collection of defaulted federal student loans. This includes wage and tax return garnishment, Social Security and Disability income garnishment (without a court order), termination from public employment, suspension of professional licenses, denial of security clearances, and others. Moreover, federal loans have no statute of limitations associated with them, are exempt from truth in lending laws, and guarantors are typically exempt from Fair Debt Collection practice regulations (this does not apply to third party collection companies, however).

Importantly:Federal loans are largely impossible to discharge through bankruptcy*. However, if you are unemployed, have a medical crisis, or have low earnings, there are ways to postpone payments temporarily through deferments, and forebearances. See Finaid.Org for more information about these options.

When a Private loan defaults:

Private loans are not guaranteed by the federal government (notwithstanding recently announed
bailout programs for the student loan industry). Really, they are equivalent to a credit card, a bank line of credit, or any other type of loan between private parties...with one MAJOR difference (explained below). There are a myriad of procedures used for delinquent private loans.

Sometimes there is even a third party guarantor, as with federal loans (TERI, for instance is a private loan guarantor). Check with your lender to find out more about collection procedures, interest rate variability, fees (which can be horrendous), etc for your loans.

As of October, 2005, private loans were made equivalent to federal loans with regards to bankruptcy discharge. That this was even attempted by the student loan industry was unthinkable...after all, why should a non-federally guaranteed loan of any kind be specifically exempted from bankruptcy protections? This is akin to taking bankruptcy protections away from credit cards! The answer is that there really is no good answer*. However, standard consumer protections, such as truth in lending requirements, statutes of limitations, etc. do apply to private loans, so the borrower does have at least some consumer protections for private loans. Forebearances, and deferments, however, are typically more difficult to get for private loans. Some companies, such as Sallie Mae are even requiring that students begin loan repayments for private loans while still in school!

You should now be able to tell the difference between private, and federal loans. Are your Federal? Are the private? Or do you have both types? Find this out at a minimum, before attempting to negotiate with your lender.

The Next Step:

This is the most basic, rudimentary information that you need to know first before you can even speak about the
subject. A good next step is to read the Book, The Student Loan Scam We strongly recommend that you read the
various media stories that have been written about this subject in the past 4 years. Also, we recommend using Finaid.org as a resource for a wide range of questions about student loans.

*Think this is unfair? Then join us in fighting to restore standard consumer protections that were taken away... But finish reading this page first!