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?

Being delinquent or defaulting on a loan may affect many areas of your life:
Student Loans

You will lose eligibility for loan deferment, forbearance, and repayment plans.

You will not be eligible for additional federal student aid.

You may be required to immediately repay the entire unpaid amount of your loan. This is known as acceleration.

Future Income

You may not be eligible for certain types of employment.

You may be denied a professional license (Doctors, Engineers, etc.).

Your loans may be turned over to a collection agency and you will have to pay additional charges, late fees, and collection costs.

You may have part of your income withheld by the federal government. This is known as wage garnishment.

Your federal and state income tax refunds may be withheld and applied to your debt. This is known as a tax offset.

Credit Score

Your credit score will be damaged.

You may have difficulty qualifying for credit cards, car loans, or mortgages, and will be charged much higher interest rates.

You may have difficulty signing up for utilities, getting car or home owner's insurance, or getting a cell phone plan.

You may have difficulty getting approval to rent an apartment (credit checks may be required).

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.