Consequences of Default and Actions to Take

What is default?

A borrower defaults on a loan when they fail to make an installment payment, or otherwise do not comply with the terms of the promissory note or other written repayment agreement. Failing to make a payment for 270 days on a federal loan or 120 days on an alternative loan, if you do not have a deferment or forbearance, will cause your Loan Servicer to take steps to place you loan in default.

What are the consequences of default?

• You will incur collection costs of up to 25%
• Your entire loan balance (as well as any collection costs) is immediately due in full
• The interest rate on your loan may increase
• Your credit rating will be damaged and your credit score will be lowered (this affects ability to obtain a mortgage, buy a car, etc.); a default stays on your credit report for up to 7 years
• The government may withhold your tax return and apply it towards your loan debt
• You employer may be legally obligated to forward 15% of your salary towards repayment of your loan
• You will no longer be eligible for financial aid, including loans and grants
• You will no longer be eligible for deferments of any type
• You may lose your professional license
• Federal debt collection procedures may be taken against you

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 lender 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. Borrowers who avoid their lender may lose out on these readily available repayment benefits and options.

What you can do if you default on your loan:

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.

Rehabilitation:

Through rehabilitation, borrowers can

• 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)
• garnishments of tax refunds and/or wages will stop.

To rehabilitate a loan, borrowers must contact their loan holder and begin making payments on the loan. Borrowers who make 9 full voluntary payments within 20 days of the monthly due dates within 10 consecutive months qualify to have the loan rehabilitated.

Settlement:

Borrowers may also be able to negotiate a settlement with the collection agency. This can reduce what a borrower owes, but it will NOT clear the default status and will NOT LIKELY be a huge discount. When settling, borrowers may be able to have collection charges waived and may even be able to reduce the total amount owed. Borrowers who have been in default for numerous years and do not have the resources to repay the loan are more likely to be able to negotiate a settlement.

NOTE: Student loans are now generally NOT dischargeable through bankruptcy. Even if you satisfy the requirements of an undue hardship discharge, this will often result in just a partial discharge of the debt.