Federal Loan Default
Federal Loan 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.
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.
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 higher interest rates). It is important to begin repaying as soon as you receive a bill. Keep track of your student loan and learn how to manage your loan repayments.
How do I avoid default?If you are having trouble making payments on a loan from the William D. Ford Federal Direct Loan Program immediately contact your loan servicer, the agency that handles the billing and other services for your loan.
If you are having trouble making payments on your Federal Perkins Loan, immediately contact the school where you received your loan.
Take the time to fully understand your loan agreement and the types of loans you are receiving. It’s also important that you not borrow more than you need or more than you expect to be able to repay. Develop a sound—and realistic—financial plan.
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.
- It will take years to reestablish your credit and recover from default.
What if my loans are in default, but I think it’s an error?
If you believe your loan has been placed in default by mistake, you may be able to correct the error by contacting your Loan Servicer for information on how you can resolve the error to correct your account.
Getting out of Default
Options for getting out of default include loan repayment, loan rehabilitation, and loan consolidation.
When placed in default, any William D. Ford Federal Direct Loan (Direct Loan) Program loan that is owned by the U.S. Department of Education (ED) is assigned to ED’s Default Resolution Group for collection. For defaulted Federal Perkins Loans, you’ll need to check with the school from which you borrowed to find out about loan repayment.
If you are unsure which type(s) of loan(s) you have, check your original loan documents or use the National Student Loan Data System (NSLDS). Note that information about any private student loan you may have received will not be included in NSLDS.
You have several options for getting your loan out of default. These include
- loan repayment,
- loan rehabilitation
- loan consolidation
One option for getting out of default is repaying your defaulted student loan in full. Get repayment information for your loan(s) from your Loan Servicer and learn about how to repay and where to send payments. Repayment information for defaulted Federal Perkins Loans—contact the school where you received your Perkins Loan.
More information on Loan Repayment
Another option for getting your loan out of default is loan rehabilitation. To rehabilitate your Direct Loan, you and ED must agree on a reasonable and affordable payment plan. (Remember, contact your school for your Perkins Loan.)
Advantages of rehabilitation include:
- Your loan(s) will no longer be considered to be in a default status.
- The default status reported by your loan holder to the national credit bureaus will be deleted.
- You will be eligible for the same benefits that were available on the loans before the loans defaulted. This may include deferment, forbearance, and Title IV eligibility.
- Wage garnishment ends and the Internal Revenue Service no longer withholds your income tax refund.
If you are a Direct Loan Borrower:
To rehabilitate a Direct Loan, you must make at least nine (9) full payments of an agreed amount within twenty (20) days of their monthly due dates over a ten (10) month period to the U.S. Department of Education (Department). Payments secured from you on an involuntary basis, such as through wage garnishment or litigation, cannot be counted toward your nine (9) payments. Once you have made the required payments, your loan(s) will be returned to loan servicing.
If you are a Perkins loan borrower:
To rehabilitate a Perkins Loan, you must make nine (9) on-time, monthly payments of an agreed amount to the Department. Payments secured from you on an involuntary basis, such as through wage garnishment or litigation, cannot be counted toward your nine (9) payments. Once you have made the required payments, your loan(s) will continue to be serviced by the Department until the balance owed is paid in full.
More information on Loan Rehabilition
You also have an option for getting out of default through loan consolidation. Loan consolidation allows you 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. A defaulted federal student loan may be included in a consolidation loan after you’ve made arrangements with ED and made several voluntary payments (contact your school for information about making payments on a Perkins Loan). Usually, you would be required to make at least three consecutive, voluntary, and on-time payments prior to consolidation.
More Information on Direct Loan Consolidation