Defaulted Student Loans
If you don’t make your loan payments, you risk going into default. Defaulting on your loan has serious consequences. Your school, the financial institution that made or owns your loan, your loan guarantor, and the federal government all can take action to recover the money you owe. Understand how missing a loan payment can be a problem, what default means and the consequences of default, and what you need to do if your loan is in default or if you think the default on your loan is an error.
What is default?
To default means you failed to make your payments on your student loan as scheduled according to the terms of your promissory note, the binding legal document you signed at the time you took out your loan.
How Is Missing A Payment A Problem?
Your loan becomes delinquent the first day after you miss a payment. The delinquency will continue until all payments are made to bring your loan current. Loan servicers report all delinquencies of at least 90 days to the three major credit bureaus. A negative credit rating may make it difficult for you to borrow money to buy a car or a house (you will be charged much higherinterest rates). You also may have trouble:
- signing up for utilities,
- getting home owner’s insurance,
- getting a cellphone plan, or
- getting approval to rent an apartment (credit checks usually are required for renters).
When Is My Loan Considered To Be In Default?
If you repay your loan
- monthly, default occurs when you fail to make a payment for 270 days.
- less than once a month, default occurs when you fail to make a payment for 330 days (this applies only to FFEL Program loans).
What Are The Consequences Of Default?
The consequences of default can be severe:
- The entire unpaid balance of your loan and any interest is immediately due and payable.
- You lose eligibility for deferment, forbearance, and repayment plans.
- You lose eligibility for additional federal student aid.
- Your loan account is assigned to a collection agency.
- The loan will be reported as delinquent to credit bureaus, damaging your credit rating. This will affect your ability to buy a car or house or to get a credit card.
- Your federal and state taxes may be withheld through a tax offset. This means that the Internal Revenue Service can take your federal and state tax refund to collect any of your defaulted student loan debt.
- Your student loan debt will increase because of the late fees, additional interest, court costs, collection fees, attorney’s fees, and any other costs associated with the collection process.
- Your employer (at the request of the federal government) can withhold money from your pay and send the money to the government. This process is called wage garnishment.
- The loan holder can take legal action against you, and you may not be able to purchase or sell assets such as real estate.
- Federal employees face the possibility of having 15% of their disposable pay offset by their employer toward repayment of their loan through Federal Salary Offset.
- It will take years to reestablish your credit and recover from default.
Getting Out Of Default
Direct Loan Program and FFEL Program
To rehabilitate a defaulted Direct Loan or FFEL Program loan, you must agree in writing to
- make nine monthly payments,
- make each payment within 20 days of the due date, and
- make all nine payments during a period of 10 consecutive months.
Under a loan rehabilitation agreement, ED or the guaranty agency will initially offer you a payment amount that is equal to 15 percent of your discretionary income. You’ll need to provide documentation of your income.
Depending on your income, your monthly payment under a loan rehabilitation agreement could be as low as $5.
If you can’t afford the initial monthly payment amount, you can ask ED or the guaranty agency to recalculate the payment amount based on your documented income and expenses. Depending on your individual circumstances, this recalculated payment amount may be lower than the payment amount you were initially offered. You can choose either of the payment amounts.
- Your loan is rehabilitated only after you have made the required payments. If you are rehabilitating a defaulted FFEL Program loan that has been assigned to a guaranty agency for collection, the guaranty agency must also sell the loan to a lender or assign it to ED before it can be considered rehabilitated.
- Involuntary payments, such as Administrative Wage Garnishment (AWG) payments and payments received through the Treasury Offset Program (TOP), do not count toward your rehabilitation payments. Also, involuntary payments may continue to be taken from your pay or from federal benefits until your loan is no longer in default or until you have made some of your rehabilitation payments.
Federal Perkins Loans
To rehabilitate a defaulted Federal Perkins Loan, you must make a full monthly payment each month, within 20 days of the due date, for nine consecutive months. Your required monthly payment amount is determined by the school where you took out the loan, or by ED if the loan has been assigned to ED’s Default Resolution Group. For more information on rehabilitating a defaulted Federal Perkins Loan, contact the owner of the loan.
Benefits of Loan Rehabilitation
Once your loan is rehabilitated, the default status will be removed from your loan. You will regain eligibility for benefits that were available on the loan before you defaulted, such as deferment,forbearance, a choice of repayment plans, and loan forgiveness, and you will be eligible to receive additional federal student aid. In addition, national consumer reporting agencies (credit bureaus) will be instructed to remove the record of the default from your credit history for the rehabilitated loan. However, late payments reported before the loan defaulted will not be removed from your credit history.
You can rehabilitate a defaulted loan only once.
Another option for getting out of default is to consolidate your defaulted federal student loan into a Direct Consolidation Loan. Loan consolidation allows you to pay off one or more federal student loans with a single new loan that has a fixed interest rate.
To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, you must either
- agree to repay the new Direct Consolidation Loan under an income-driven repayment plan or
- make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before you consolidate it.
If you choose the first option (repaying under an income-driven plan), at the time you apply for the Direct Consolidation Loan you must select one of the available income-driven repayment plans and provide documentation of your income. If you want to consolidate a defaulted PLUS loan that you obtained as a parent to pay for your child’s education, the only income-driven plan you can choose is the Income-Contingent Repayment Plan (ICR Plan).
If you choose the second option (making three consecutive, voluntary, on-time, full monthly payments), you may repay the new Direct Consolidation Loan under any repayment plan you are eligible for.
If you are consolidating a defaulted Federal Perkins Loan, you must also consolidate at least one Direct Loan or FFEL Program loan.
After your defaulted loan has been consolidated, your Direct Consolidation Loan will be eligible for benefits such as deferment, forbearance, and loan forgiveness. You’ll also be eligible to receive additional federal student aid. However, consolidation of a defaulted loan does not remove the record of the default from your credit history.