Consequences of Default and Actions to Take

What is default?

Default is failure to repay a loan according to the terms agreed to in the promissory note. For most federal student loans, you will default if you have not made a payment in more than 270 days. You may experience serious legal consequences if you default.

What are the consequences of default?

  • You will not be eligible for future federal student aid
  • Your student loan account may be turned over to collections
  • Your credit rating will be damaged
  • Your tax refunds and wages may be garnished

Preventing Default:

Unforeseen circumstances can make it difficult for borrowers to repay their federal loans. Borrowers who have difficulty making their loan payments should contact the loan servicer as soon as possible to find out which options are available to them. Some options may include alternative repayment plans to lower monthly payments, or deferments and forbearances which temporarily suspend monthly loan payments.

What you can do if you default on your loan:

Rehabilitation:

Through rehabilitation, borrowers

  • bring their loan out of default
  • eliminate the default from their credit report
  • regain eligibility for federal student aid and its benefits (including forbearance and deferment)
  • eliminate garnishments of tax refunds and/or wages

To rehabilitate a loan, borrowers must contact their loan servicer(s) for more information.

Loan Consolidation:

Borrowers may have the option for getting out of default through loan consolidation. Loan consolidation allows a borrower to pay off the outstanding combined balance(s) for one or more federal student loans to create a new single loan with a fixed interest rate. For more information, please visit: www.studentaid.ed.gov/repay-loans/consolidation.

Satisfactory Repayment Arrangements:

Borrowers with a defaulted loan can regain eligibility for federal student aid by contacting their loan holder and making satisfactory repayment arrangements. This means making at least six voluntary on time payments within six consecutive months. This is a step in the right direction but does NOT clear the loan’s default status. Default status can only be cleared through full loan repayment, loan rehabilitation, or loan consolidation.

Settlement:

Borrowers may be able to negotiate a settlement with the collection agency. Borrowers should be aware that a settlement will NOT clear the default status or reinstate Title IV student aid eligibility.