If you fail to make the required payments on your federal student loan and the account becomes 270 days (approximately nine months) delinquent, it is in default, and the guaranty agency will purchase the loan from your holder. Once the loan is placed in a default status, the entire balance (principal, interest, and collection fees) is immediately due and payable to the guaranty agency.
Consequences of Default
The consequences of default are serious:
- You may be subjected to court action requiring total payment of your loan.
- Your credit rating can be severely damaged, making it difficult to borrow money for a car or home, or to receive credit cards. The default status can remain on your credit report for several years after you pay the loan in full.
- Your federal Treasury payments (including federal tax refunds) and state income tax refunds may be withheld.
- Up to 15 percent of your disposable income can be garnished (administrative wage garnishment)
without a court order.
- You won’t be eligible to receive any more federal financial aid (and possibly state aid) unless you make acceptable arrangements to repay what you already owe.
- You may be ineligible for assistance under most federal benefit programs.
- You’ll be ineligible for deferments or forbearance.
- You’ll be liable for the costs associated with collecting your loan up to 25 percent of your principal and interest balance, plus court costs and attorney fees.
- You may not be able to renew a professional license you hold or may jeopardize your chances for certain types of employment.
- Your loan may be assigned to a professional collection agency.
Default can be avoided. Remember the following:
- Before you take out a loan, make sure you fully understand your options and responsibilities. A student loan can be a valuable tool to help you realize your educational and career dreams, however, it should be the last 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. Develop a sound–and realistic–financial plan.
- Make your loan payments on time, and notify your lender or servicer when you move or change your address.
- 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 and give you information about deferments and forbearance.
- Keep a record regarding your loan. Make copies of all letters, canceled checks, and any forms you sign.
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