What Is Default?
When you don’t repay your student loan according to the terms and conditions of your promissory note, your loan becomes delinquent. After a certain period of non-payment, generally 270 days, your loan will be in default.
- Your loan balance will increase with collection costs added to your account balance.
- Your default will be reported to all national credit bureaus and will negatively impact financing of new purchases such as a home or car. It can also affect your ability to get a job or an apartment.
- You will lose repayment and deferment options that would normally be available.
- Your wages can be garnished by up to 15% to repay your loan.
- Your federal and state income tax refunds or other government payments can be seized to repay your loan.
- Your state-issued licenses may be suspended.
- You will no longer be eligible for the Title IV Student Financial Assistance, including student loans, Pell grants, and Federal work study.
- Your loan will be turned over to a Guaranty Agency for collection or possibly to an outside collection agency.
- Even if you file bankruptcy, you will still be responsible to make your student loan payments as scheduled.
Communication with your lender/servicer is very important. They want to help you! Be sure your lender/servicer has your current address and phone numbers. Contact your lender/servicer as soon as possible on any changes, especially if you realize you will have difficulty making payments. If you find yourself having trouble managing your debt, ask for help. Your lender/servicer can offer you options to help you get through a rough spot. Two of these options are deferment and forbearance. If you have a Direct Loan, the federal government through the U.S. Department of Education is your lender.
You are entitled to defer your student loan payments when applicable criteria are met. Through deferment you can postpone your scheduled student loan payments for various reasons, such as unemployment, economic hardship, and school enrollment. Your lender/servicer determines if you meet the requirements for a deferment.
During a deferment period, you are responsible for paying the interest that accrues on unsubsidized Direct or PLUS loans, as well as unsubsidized portions of a Consolidation loan. If you fail to make required interest payments during a deferment period, the lender/servicer may capitalize the unpaid accrued interest.
Forbearance is an option lenders/servicers can offer you in which they permit you to temporarily cease payments, allows an extension of time for making payments, or temporarily accepts smaller payments than were previously scheduled. Medical or financial problems that do not meet the requirements for a deferment might qualify you for forbearance.
During a forbearance period, you are responsible for paying the interest that accrues on any loan, even a subsidized Stafford or Direct Loan. If you fail to make required interest payments during a forbearance period, the lender/servicer may capitalize the unpaid accrued interest.
A lender/servicer may grant a discretionary forbearance to assist you in fulfilling the repayment obligations of the loan and to help prevent default. You may request this forbearance by contacting your lender/servicer verbally or in writing. The lender/servicer must approve the deferment or forbearance request before your payments can be suspended.
- Standard – Your repayment will be a fixed amount for the life of the loan. Click here to access a Standard repayment calculator.
- Graduated – Your payments start low and gradually increase during your repayment period. Click here to access a Graduated repayment calculator.
- Income-Sensitive – Your payments are adjusted annually based on your current income. Click here to access an Income-Sensitive repayment calculator.
- Extended – Your payment term may be extended up to 25 years if your loan balance is $30,000 or more. Click here to access an Extended repayment calculator.
- Income-Based – Under this plan, the required monthly payment will be based on your household income and family size during any period when the borrower has a partial financial hardship. Click here to access an Income-Based repayment calculator.
- Consolidation – This is an option to consider if you have student loans with more than one lender/servicer or if you would like to lower your monthly payments by extending the repayment term. Click here to access a Loan Consolidation repayment calculator.
If your loan is close to default, letters and phone calls will be made in an effort to help you establish satisfactory repayment arrangements. It is important that you let your lender/servicer help you avoid the harsh consequences of default.
What If My Loan Is Already In Default?
There are options available to get your loan out of default.
1. Payment in full: By paying off your loan in full within 105 days of default, you can avoid paying collection costs, save a lot of money in interest, and regain eligibility for additional financial aid.
2. Loan Rehabilitation program: This program helps you get back to making regular monthly payments. To rehabilitate a loan, you must follow these requirements:
- Make at least nine on-time voluntary full monthly payments. (Payments obtained by federal or state treasury offset, wage garnishment, or bankruptcy payments are not considered voluntary payments.)
- You cannot pay ahead or prepay future installments in order to accelerate the rehabilitation process.
- Your lender/servicer work with you to determine a reasonable and affordable monthly payment based on your loan balance and your financial circumstances.
3. Loan Rehabilitation Benefits
- Removal of the defaulted loan information from your credit report.
- Regain eligibility for additional federal student aid.
- Regain eligibility for remaining deferment or forbearance periods.
4. Loan Consolidation: Loan Consolidation allows you to consolidate all of your loans into one monthly payment, reducing collection costs. Defaulted loans may also be reported as paid-in-full to credit bureaus.