Default Management

The Default Management Group of the Department of Education collects on student loans which were given under Title IV of the Higher Education Act of 1965.  Stafford Loans were granted by banks (and/or other lending institutions) and guaranteed by the U.S. Government.  Similarly, Supplemental Loans for Students (SLS) were also made by banks to undergraduate, graduate and professional students.  These loans, as well as Perkins loans, Direct Loans and Health Professions Loans can be consolidated in the Federal Loan Consolidation program.   Parent Plus loans used to be called Parental Loans for Undergraduate Students.  Beginning in 2005, PLUS loans were also made to graduate and professional students.

Perkins loans used to be called National Defense/Direct Student Loans (NDSL).  Perkins loans are held by education institutions but can be transferred to the Department of Education for collection.

Private collection agencies are called PCA’s.  Private Collection Agencies are bound by the Fair Debt Collection Practices Act.  Collection activities and collectors with the Department of Education are not bound by the Fair Debt Collection Practices Act.  When a Private Collection Agency is tasked with collecting on federal student loans, a clause excludes the Department of Education from any liability.

The Department of Education can release your loan records for the purpose of servicing and/or collecting on the debt under the Privacy Act of 1974.  If you want your attorney to have access to your loan records, you will need to provide 3rd party authorization to the Department of Education.

Defaulted loans can be reported for 7 years on your credit report for Federal Family Educational Loans (FFELs).  20 USC Section 1080a(f)(1).  Defaulted Direct Loans will also be reported for up to seven years because Direct Loans should be treated the same as FFEL Loans under 20 USC Section 1087e(a)(1).

Default information on a Perkins loan will likely be reported until the loan has been completely paid in full under 20 USC Section 1087cc(c)(3).

Default for FFEL loans will likely be reported when the guaranty agency lays claim to the loan under 20 USC Section 1080a(f)(1).  Default for Direct Loans will likely be reported as of the date the loan has been transferred to the Default Resolution Group.

If you rehabilitate or begin to repay and then default on the loan again, you will likely have set a new default date for credit reporting purposes for seven years under 20 USC 1080a(f)(3).


Reloadable Credit Cards

The majority of Americans need help paying off more than $10,000 in credit card debt.  Be committed to helping resolve your student loan and other debt problems.  After your situation is resolved, your credit cards can be cut up and forgotten. However, you may still need to make some purchases on credit. Here is another way to save money and pay down your student loans (before you consider bankruptcy):

As an alternative to traditional credit cards, a reloadable credit card can be used instead. Reloadable credit cards are an easy way to ensure that you don’t spend too much money. With reloadable credit cards, you transfer money from your checking account using a secure web site. You can manage your finances by limiting the amount and number of transfers each month and then by checking the balance on the account each day. Limit the amount of the transfer to only what you think you’re going to need.

The transfer usually takes 3 to 5 business days (Monday through Friday) for the money to go through. Those 3 to 5 business days require that you plan your expenses because, if you haven’t transferred enough, you will have to make another transfer and wait another 3 to 5 business days. This limitation forces you to carefully plan your expenditures.

If you want to travel and use a prepaid, reloadable credit card you will have to be sure that a hotel or rental car location will accept a prepaid, reloadable card. Oftentimes, an additional charge is made to the card as a security deposit, or you will have to provide a cash deposit. But, by using a prepaid, reloadable credit card instead of a credit card, you will be required to carefully plan your trip and how much you are going to spend.

Get a free credit report before you get a reloadable credit card. Cancelling a credit card can make the entire amount due and can adversely affect your credit rating. More information on these topics will be provided in the future.

College Savings Plans

A 520 plan is a college savings planning tool. The number 529 is the Internal Revenue Code Section for which it is named.

There are two types of 529 plans:

  • Prepaid Tuition Plans
  • College Savings Plans

Basically, a parent (or grandparent) puts money into an account so that the money can be withdrawn to pay for the college expenses of a child (or grandchild).

If the investment account grows over time, the withdrawals should be tax-free as long as the funds are used to pay for tuition and/or room and board at a college (a.k.a. qualified higher education expenses).

Prepaid Tuition Plans

Many states have have set up Prepaid Tuition Plans for their schools and, in some cases, the investment is guaranteed. If you know which college you want your child (or grandchild) to attend, prepaid tuition plans offer an excellent opportunity to pay for college credits and units and, in some cases, other higher education expenses.

By setting up a Section 529 plan for Prepaid Tuition, you get the chance to buy tuition at current rates. That way, if the tuition at your chosen school rises, you could end up paying a lot less for their college.

Prepaid Tuition Plans outline exactly how much the recipient (beneficiary) can receive, based on the number of years of college and other factors. The amount of money you set aside each year is determined by the prepaid tuition plan and the beneficiary’s age.

Prepaid Tuition Plans are usually for state of residency and other limitations (such of length of schooling) should apply. The timing of the enrollment (set-up) will be limited and/or vary depending on the state.

College Savings Plans

A College Saving Plan is more broad based: Many expenses can be covered, not just tuition. Of course, the expenses should be directly related to the cost of higher education. There are, however, limits to the amount of money you can contribute to these types of plans.

College Savings Plans usually do not offer guarantees, but you can have the money apply to either a child or an adult, whereas the Prepaid Tuition Plan is normally for a child.

College Savings Plans are usually purchased through a licensed broker or investment specialist whereas a Prepaid Tuition Plan is usually purchased through the state of the college/institution.

After the investment account is set-up, if you withdraw the money early (and not for college), there’s a 10% penalty (reported on your tax return) for the amount the money has grown (appreciated). The state tax effect of this transaction could vary.

Some states offer incentives to purchase into a Prepaid Tuition Plan, such as a deduction on your tax return during the year of your lump-sum investment.

It’s a good idea to seek the help of a professional with regards to a Internal Revenue Code Section 529 plan.