by Jeff Sovern
Here. An excerpt:
If you default on your student loan, you're subject to a penalty up to 25% of the amount in default.
Remarkably, according to a DOE spokesperson, one in six students in default are assessed the 25% penalty after collection efforts of more than 14 months. In practice, given DOE leniency, most borrowers won't ever have to pay the 25% penalty. But some will and, in theory, most might have to pay at least some part of the penalty.
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Perhaps the most significant problem with the 25% penalty is that it isn't particularly well-disclosed. Though borrowers receive ample warning about the general perils of default -- getting sued, getting wages garnished, getting income-tax refunds intercepted, paying collection fees, having your credit rating pummeled -- there apparently is only one Web page at the Department of Education that mentions the 25% penalty. "The amount needed to satisfy a student loan debt collected" by the DOE's third-party collection agents "will be up to 25% more than the principal and interest repaid by the borrower," states a Federal Student Aid page that's one of six tabs available on the FSA's introductory default page.
That contrasts dramatically with the rules for disclosure of credit card penalty fees, which must be conspicuously disclosed in the "Shumer box" accompanying soliciations.