The Importance of Paying Student Loans

The government has special powers to collect on your student loan--including seizure of your tax refunds, denying you new student loans and grants, seizing up to 10 percent of your wages without a court order, and charging you very large collection fees.

On the other hand, you can sometimes keep the government from using these special collection powers by choosing from a variety of excellent options that are available when you cannot afford to pay your student loan. Unfortunately, you cannot sit back and wait for the government to offer these choices to you. You must know about and request these options on your own. Requesting one of these options may allow you to skip payments for a while, reduce your payments, stop collection efforts against you, and in certain cases involving a school closure or school misconduct, may even allow you to cancel out the loan and receive a refund.

Identify the types of loans you have
There are three major types of student loans and a number of different lenders to whom you might owe repayment. Your rights and best strategies will vary depending on what type of loan you have.

From about 1980 to 1995, the most common type of student loan was a Stafford or Guaranteed Student Loan (GSL). GSLs come in two types: subsidized (where the government pays part of the interest costs) and unsubsidized.

Related to GSLs are unsubsidized GSLs and PLUS loans taken out by students' parents. Generally, the rules concerning GSL loans also apply to these loans. Subsidized and unsubsidized GSLs, SLS and PLUS loans are all called Federal Family Education Loans, or FFELs. GSL loans are very confusing, and it is often hard to figure out whom to talk to about payment problems.

Even though the school might have helped you fill out the loan papers, the loan was actually from a bank. That bank may have sold the loan to another lender, such as the Student Loan Marketing Association (Sallie Mae). Whoever is holding the loan might hire another company to "service" the loan. Loan servicers receive your payments and correspond with you. If you stopped making payments on that loan, the loan was then turned over to a guaranty agency. For certain older loans, it was eventually passed on to the U.S. Department of Education.

Starting in about 1994, certain schools started offering a new type of loan called a Federal Direct Student Loan, often called an FDSL or a Direct Loan. These loans work differently than GSLs and others because the school, not the bank, arranges for a loan between the U.S. Department of Education and the student. Payments are made directly to the Department of Education.

A third type of loan is a Perkins Loan, formerly called a National Direct Student Loan or NDSL. This loan is made directly from the school you attended, and you repay the amount to the school. If you stop paying the school, the loan is eventually turned over to the U.S. Department of Education.