CNN Money: Student Loans Can Carry 25% "Hidden Penalty"

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.

* * *

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. 

Comments

[Michael]

Outside collection agency contingency fees were as high as 25% not too long ago. Perhaps the high default penalty was set in anticipation of those collection costs.
Debt collection agency contingency fees on unsecured debts average between 15% and 18% currently.
Given the "to the grave" nature of student loan debt (worse than taxes for most), and the enhanced methods of collection (no SOL, tax refund intercept, non-dischargeability), contingent collection fees should be lower than market rates for collecting unsecured debts.

I have no doubt that changes to national student loan policies are coming. It would be nice if the changes made better sense for students and the nation as a whole, as opposed to lenders and the securitization market this go around.