Loan Default

Default is the technical term for failure to repay your student loan. When your student loan has been delinquent for at least 270 days due to broken payment arrangements or other terms of the promissory note that were not adhered to. When the lender or servicer notifies the guarantor that payment arrangements have not been kept by the borrower, the guarantor takes over the defaulted loan.
During the delinquency period, the lender must exercise "due diligence" in attempting to collect on the loan; that is, the lender must make repeated efforts to locate and contact you about repayment. Your lender is required by law to perform certain collection activities -- such as sending delinquency letters and phone calls. After 270 days of delinquency, you are put in default status.

Why is default so serious?

Loan default has long-lasting and permanent outcomes. If you default on your loan, any or all of the following may happen:

• Throughout delinquency, late fees and collection costs may accumulate on your loan(s).
• You can't qualify for more student aid.
• Your default will be reported to all national credit bureaus and may negatively affect financing a mortgage or car loan.
• Your wages may be garnished to repay your loan(s).
• Your state and/or government income tax refunds may be seized to repay your loan(s).
• You may be sued for the balance of your loan(s).

Consequences of a Defaulted Loan

• The loan becomes due and payable in full.
• The borrower is no longer eligible for additional Title IV funds.
• The borrower no longer qualifies for deferments or forbearances.
• Collection costs are assessed.
• The borrower’s credit report is updated to reflect the default status.
• Federal tax refunds or other federal payments that the borrower may be entitled to may be seized.
• Wages may be garnished through Orders of Withholding.
• The loan may be referred to an outside collection agency.
• The loan may be referred to the United States Department of Education for further collection.
• State income tax may be seized.

Ask for help right away! Don’t delay!

How to avoid default

Keeping your account current is a sure way to avoid default. The important thing is to contact your lender or servicer to work out a suitable option. Students typically do not plan to default on their student loans. The ones who do default, usually just failed to PLAN at all. Here are some simple ideas to help you avoid defaulting on your student loan.

• Make sure you fully understand your options and responsibilities before you take out a loan. A student loan can be a valuable tool to help you realize your educational and career dreams. However, it should be the last financial option you exercise. You should explore and use scholarships, grants, work-study, part-time jobs, and family contributions first to finance your education.
• Don't borrow more than you need or more than you expect to be able to repay. Estimate the amount of debt your chosen career can support.
• Develop a sound--and realistic--financial plan. Develop a budget and follow it. The sooner you know you're having budget problems, the sooner you can take steps to resolve them.
• Keep in touch with your lender or servicer. They will help you to stay informed about the status of your loan. Notify your lender or servicer whenever any of the following occur:
  • You have received a delinquency notice.
  • You are having financial difficulties.
  • You are unemployed.
  • You have returned to school.
  • You are disabled.
  • The amount of your monthly payment is too high.
  • You have moved or changed your name.
• Make your loan payments on time. If you can't make your loan payments on time, contact your lender or servicer immediately.
• Contact your lender or servicer immediately if you start to have problems repaying your loan. They may be able to provide you with some financing options. They can also give you information about deferments and forbearance.
• Keep records regarding your loan. Make a file of copies of all letters, canceled checks, and any forms you sign. Your records will be valuable to help sort out any problems that might arise.

Remember, your lender or servicer may file a default claim with the guarantee agency when your loan reaches 270 days delinquent. You must avoid default if you do not want to lose the many options available to you now. In addition, you want to avoid having collection costs, which can be as high as 25%, added to your loan balance.

What can I do?

Contact your loan servicer or collection agency immediately. If you have a defaulted student loan, you still have options. You can pay the loan balance in full and avoid additional costs. Rehabilitate your loan by making nine voluntary, consecutive, on-time payments of an agreed upon amount and under certain terms. Rehabilitating your loan removes the default status at completion of the agreement. You can also consolidate your loan after making three voluntary, consecutive, on-time payments. Consolidation allows you to combine several loans into one new account, with new repayment arrangements, and under new terms. You can regain aid eligibility and other benefits upon resolving your defaulted student loan.