Financial counselors or companies should never tell or advice someone to default. Most borrowers intentionally stop making payments in order for the account to default. The decision to default should directly come from the borrower after considering the pros and cons. When there seemed to be no decrease on the private student loans after paying huge monthly for a couple of years, borrowers tend to decide on strategic defaults. Strategic default is usually done by borrowers who are always late on payments. Strategic default is mostly considered by private student loan borrowers when there is very high interest rates and lack of payment options.
Before deciding to strategically default, one must consider these issues:
Credit Damage
This is one of the biggest concerns for borrowers who are always late on payments. It will take more than a year to regain a good credit score. It is advisable to make any credit based lending decisions, such as applying for mortgage, auto loans or refinances, before missing the first due payment.
Settlement Savings
Why would you risk getting a bad credit score when you can manage to solve the problem through settlement negotiations? Lenders of private student loan fully expect some of the loans to not be paid at all. Some loans are not even paid at all. Lenders usually settle hundreds of millions of dollars every year. Private student loan settlements may vary but most range is 40-60% of the balance.
Accumulated Interest and Fees
There is an increase in balance during a strategic default. There is usually 5-10% of the balance before missing a payment. Most clients usually get 5% of the balance because of the interest and fees from the first missed payment. Borrowers are strongly encouraged to settle right away after they’ve defaulted. Settlement savings usually offset any fees and interest added during the strategic default.
Potential Legal Action
If no settlement is agreed after strategically defaulting a student loan, it may lead to the possibility of litigation. Lenders usually threat borrowers of legal action but it is usually a last resort for them. One can only be taken to court if he has received several disclosures mandated by FDCPA and if a collection attorney who is licensed (either in the lender’s or borrower’s state) receives the accounts to collect on for the lender.
Weighing the Pros and Cons
Strategically defaulting a private student loan should not be taken lightly and is considered as a very serious financial decision. Borrowers are expected to receive lots of letters and phone calls. Calls and collection letters are sent to your workplace. Having a debt collector can help minimize the calls and other forms of contact as they will serve as the main person to be contacted when you are out of reach.
One must consider the positive and negative effects of strategic default before doing it as it is not advised professionally. Always talk to the lender first about settlement before deciding on anything to avoid further problems and complications in the future.
via Blogger The Right Way To Private Student Loan Debt Settlement
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