Defining Default on a Loan

Interviewer: First of all, so when clients first come to you are they on the verge of default? Is that usually where they’re at with their loan?

A. Campbell: That’s the worst place to be. If you are in default and there’s two different times. Let me clarify here. If you’re dealing with a private student loan lender and they say you’re in default, technically, they don’t really know what that means.

With Credit Card Lenders and Private Student Loan Lenders, You Can Literally Be in Default If Your Payment Is One Day Late

The word “default” is defined by the agreement that he signed. Most of the time, such as with a credit card agreement or a private student loan agreement, you are technically in default the day that you’re late with a payment. You’re one day late, you’re in default.

That doesn’t mean the private student loan collector will then pump your interest rate up to the default interest rate. That just means by the terms of the agreement you’re in default, but the private student loan lender will repeatedly misrepresent that. They’ll say, “You’re in default,” after 30 days or after three months. They repeatedly misrepresent that.

With the exception of the Perkins Loan, with Government Student Loans, the Borrower Is Not Technically in Default until 270 Days

In the governmental loan issue the default is not until 270 days has passed from the due date. It’s a lot more generous. The government doesn’t want to default you and they really work to keep the payments coming in. The government knows that it’s frankly, just the same as an attorney who’s collecting on a debt. An attorney who’s collecting on a debt doesn’t want to have sue you. All they want are steady payments coming in.

Defaulting on a Federal Student Loan Immediately Adds 25% to the Balance Due

The government is just like that. They want steady payments coming in and they want you making some contribution. It’s funny that private attorneys are the same way. All they want you to do is make payments. The worst thing you can do with a federal loan is default because immediately added to that is 25%.

If you owe $100,000 in student loans and you default, immediately added to that is $25,000.

Government Student Loans in Default Are Assigned to a Private Student Loan Collector

Interviewer: Why is the percentage rate so high?

A. Campbell: Because the federal government, once it’s in default, moves from the federal government collecting it to a private student loan collector and somebody has to pay the bill that private student loan collector.

Interviewer: So they tack on 25%?

Some Federal Student Loans Can Be Subject to an Additional 40% Interest Rate Charge If the Collection Activity Proceeds to a Lawsuit

A. Campbell: Yes and that rate now is not always 25%. It can be for Perkins loans, there’s all sorts of exceptions. Perkins loans its 30% the first time it’s in default and 40% after you get sued if you, in fact, get sued.

Interviewer: Are those terms in the loan agreement?

A. Campbell: Absolutely, those are not and no one is surprised. I am going to explain in more detail. I’m just going to go through the loan lifecycle just to clarify a couple things here.