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Defaulting on Student Loans


This section of FinAid provides information to students
who are thinking about defaulting on their federal education loans. It summarizes the consequences of default, gives advice on how to
avoid it and, if you're already in default, how to get out of it.
See also Trouble Repaying Debt.
A separate page discusses how to settle defaulted federal student
loans for less than what you owe.
You are responsible for repaying your student loans even if you do not
graduate, have trouble finding a job after graduation, or just didn't
like your school. If you do not make any payments on your federal student
loans for 270-360 days and do not make special arrangements with your
lender to get a deferment or forbearance, your loans will be in
default. Defaulting on your student loans has serious
consequences.
Note that student loans are now generally not dischargeable through
bankruptcy. It is fairly
difficult to satisfy the requirements for an undue hardship petition,
which generally requires demonstrating that you made a good faith
effort to repay the debt, that you will not be able to maintain a
minimal standard of living and still repay the debt (usually using the
lowest monthly payment under any of the repayment plans, typically
income-contiengent or income-based repayment), and that the conditions
that prevent you from repaying the debt will likely persist for most
of the full term of the loan. Even if you satisfy the requirements of
an undue hardship discharge, often this will result in just a partial discharge of the debt.
Almost three-quarters of students who default on their loans have done
so after withdrawing from school and failing to complete their
studies.
Federal Guide to Defaulted Student Loans
The US Department of Education Debt Collection Service publishes a guide
called Guide to Defaulted Student Loans
to help students repay their defaulted student loans. It includes information about
repaying a defaulted student loan,
loan consolidation,
the consequences of default,
collection costs,
resolving disputes,
ineligibility for further Federal student aid,
and related topics.
For more information on repaying a defaulted loan, call
1-800-4-FED-AID (1-800-433-3243) or 1-800-621-3115.
Other helpful web sites include: National Student Loan Data System (NSLDS)
FSA Ombudsman
Closed Schools Student Loan Discharges Consequences of Default
If you default on your student loan: Your loans may be turned over to a collection agency.
You'll be liable for the costs associated with collecting your
loan, including court costs and attorney fees.
You can be sued for the entire amount of your loan.
Your wages may be garnished. (Federal law limits the amount
that may be garnished to 15% of the borrower's take-home or
'disposable' pay. This is the amount of income left after deducting
any amounts required by law to be deducted. The wage garnishment
amount is also subject to a ceiling that requires the borrower to be
left with weekly earnings after the garnishment of at least 30 times
the Federal minimum wage, per 34 CFR 682.410(b)(9), 34 CFR 34.19(b)
and 15 USC 1673(a)(2).) Your federal and state income tax refunds may be intercepted.
The federal government may withhold part of your Social Security
benefit payments. (The US Supreme Court upheld the government's
ability to collect defaulted student loans in this manner without a
statute of limitations in Lockhart v US (04-881, December 2005).)
Your defaulted loans will appear on your credit history for up to 7
years after the default claim is paid,
making it difficult for you to obtain an auto loan, mortgage, or even
credit cards. A bad credit record can also harm your ability to find a job.
The US Department of Education reports defaulted loans to TransUnion,
Equifax and Experian.
You won't receive any more federal financial aid until you repay
the loan in full or make
arrangements to repay what you already owe and make at least six
consecutive, on-time, monthly payments. (You will also be ineligible
for assistance under most federal benefit programs.)
You'll be ineligible for deferments.
Subsidized interest benefits will be denied.
You may not be able to renew a professional license you hold.
You may be prohibited from enlisting in the Armed Forces.
And of course, you will still owe the full amount of your loan.
See
The Horrors of Defaulting on Education Debt
for a discussion of some of the more horrific consequences of
defaulting on student loans.
Preventing Default

Borrow as little as possible. Default rates increase with
overborrowing. If your total debt will be more than twice your
expected starting salary, you are borrowing too much and should
consider attending a less expensive college. Live like a student while
you are in school so you don't have to live like a student after you
graduate.
Make sure you understand your options and responsibilities
before taking out a loan.
Prepare a checklist of all your loans, including the name and
phone number of the lender,Cheap Pandora Bracelets, the type of loan, the amount of the loan,
the interest rate,Tiffany Diamonds, and especially any due dates or deadlines.
Make your payments on time.
Notify your lender or servicer promptly of any changes that may
affect the repayment of your loan. If you move or change your address,
let them know. Likewise tell them about name changes (e.g., because of
marriage), graduation or termination of studies, leaves of absence and transfers to another school.
If you encounter temporary financial difficulties, consider applying for
a deferment or forbearance on your loans. It is better to defer your payments than to go into default. Ask your
lender about these options while you are still making payments, before
you default on your loan. You won't be able to get a deferment or
forbearance after you default.
Send in your deferment form by certified mail, return receipt
requested,Tiffany And Co, so you have proof it was submitted. Continue making the
monthly payments until the lender notifies you that your deferment has
been approved. Some deferments are not automatic. If you stop making
payments before approval, your loan could go into default. This would
prevent the lender from approving the deferment. Do not make any
assumptions. If you haven't heard from the lender in a month, call
them, and keep on calling them.
If you are having trouble making payments due to a more
permanent income deficit, your lender may be able to suggest alternate repayment options, such as
extended repayment, graduated repayment, income sensitive repayment,
income contingent repayment and income-based repayment. Income-based repayment
will typically have the lowest monthly payment. The types of available repayment options currently depend
on whether the loan was issued under the FFELP or FDSLP (Direct) programs.
All of the alternate repayment plans reduce the monthly payment by
increasing the loan term. This will increase the total interest paid
over the life of the loan. For example, increasing the loan term from
10 to 20 years on a Stafford loan will cut the monthly payment by
about a third, but will more than double the interest paid over the
life of the loan.
Some students who have both federal and private student loans will use
an alternate repayment plan on the federal loans, to reduce the
monthly payment on the federal loans, and use the savings to pay off
the more expensive private student loans quicker. While this is
generally good advice, only pursue this option if you are sure you can
resist the temptation to spend the savings. Any savings must be used
to pay down debt.
Consider using a consolidation loan to combine all of your
educational loans into one big loan. This lets you send your payments
to just one lender. You may also be able to extend the term
of the loan in order to reduce the size of your monthly payments.
Keep careful records regarding your loan. Put copies of all
your letters, canceled checks, promissory notes, notices of
disbursement and other forms in a file folder. Record your payments
and the date you mailed or made the payment in a spreadsheet or a
personal finance program like Quicken or Microsoft Money.
If you have both federal and private education loans and can
afford to make the required payments on only one loan, try to avoid
defaulting on the federal loans. The federal loans have more flexible
repayment options and harsher penalties for default. Postponing Repayment
Two options available for postponing repayment of your student loans
are deferments and forbearances.
If you are thinking about defaulting on
your student loans, ask the lender whether you are eligible for a
deferment or forbearance before you default. You cannot receive
a deferment or forbearance if your loan is in default. If you default
on your loans, you are no longer eligible for deferments and forbearances.
For more information about deferments and forbearances, contact the
financial aid office at the school that issued the loan and/or the
original lender or current servicer of your loan.
Deferments
During deferment, the lender allows you to postpone repaying
the principal of your loan for a specific period of time.
Most federal loan programs allow students to defer their loans while they
are in school at least half time. For Perkins Loans and Subsidized
Stafford Loans, no interest accrues during the deferment period
because the federal government pays the interest. For other loan
programs, such as the unsubsidized Stafford loan, the interest still accrues during the deferment period. Students can postpone the interest
payments on such loans by capitalizing the interest, which increases
the size of the loan. (Capitalizing the interest adds it to the loan
principle. This increases the amount of the debt, which means you'll
be paying interest on interest,Tiffany Ring, in addition to interest on the principal.)
Deferments are commonly granted for students who are enrolled in undergraduate or graduate school
disabled students who are participating in a rehabilitation
training program
unemployment
economic hardship These deferments are for the FFELP and FDSLP loans, not the Perkins loan.
Other deferments may also be available; contact your lender for details. Note also that there are limits on the length of a deferment.
Deferments are not granted automatically. You must submit an
application and provide documentation to support your request for a deferment. Do not stop making payments on your student loans until
after you are notified that your deferment has been granted.
Forbearances
During forbearance, the lender allows you to postpone
or reduce your payments,What Is Pandora, but the interest charges continue
to accrue. The federal government does not pay the interest charges on
the loan during the forbearance period.
You must continue paying the
interest charges during the forbearance period.
Note also that there are limits on the length of forbearance.
Forbearances are typically granted in 12-month intervals for up to
three years.
Forbearances are not granted automatically. You must submit an
application and provide documentation to support your request for a deferment. Forbearances are granted at the lender's discretion, usually in
cases of extreme financial hardship or other unusual circumstances
when the borrower does not qualify for a deferment.
Do not stop making payments on your student loans until
after you are notified that your forbearance has been granted.
Getting Out of Default
To get out of default, you need to make arrangements with your
servicer or lender to repay the loan. Once you have made six
consecutive full voluntary on-time
payments, you will be eligible for additional Title IV aid. On-time is defined as within 15 days of the due date. Voluntary
excludes payments made by garnishment or other offsets.
After you
have made 9 of 10 consecutive payments within 20 days of the
due date and applied for and received
"rehabilitation", you will no longer be considered in default. At this
time record of the default will be removed from the reports to credit
reporting bureaus.
For
loan rehabilitation, the
payments must be "reasonable and affordable". This is determined by
the guarantee agency, and will consider the borrower's (and his/her
spouse's) disposable income and financial circumstances. It can be
below the required minimum payment of $50 or the interest that
accrues, whichever is greater, if the guarantee agency
determines that a smaller amount is reasonable and affordable based on
the borrower's financial circumstances.
Also, if you are seeking rehabilitation and your wages are subject to
a garnishment order, sometimes the guarantee agency will be willing to
accept the higher of the rehabilitation amount or the wage
garnishment, as opposed to the sum.
Also, if the default is very recent, the lender may not yet have
reported the default to a guarantee agency. Lenders do not need to
file a default claim until 90 days after the default occurs. If the
borrower brings the delinquency under 270 days (the definition of
default for federal education loans) within the 90-day period, before
the lender has filed a default claim, they can cure the default.
It may also be possible to
cure the default by consolidating the delinquent loan before the
lender has filed for a default claim. Since the consolidation loan is
a new loan and it pays off the deliquent loans, it effectively wipes
the slate clean.
While lenders have very powerful options for collecting defaulted
debt, and so don't need to negotiate, they will often prefer to get
the borrower into a voluntary payment plan than have to take the
borrower to court. A good rule of thumb is a payment
plan where you pay about 1% of the total amount owed per month.
For information about your options, contact the servicer of
the loan and/or the original lender or the current holder of the loan. The financial aid office at your
school should be able to tell you the name, address and telephone
number of your lender and can also provide you with help and advice
about repayment problems. You can also talk to the Default Resolution
Group at the US Department of Education by calling 1-800-621-3115.
See also the chart listing options for relief.
Collection Agencies
If you default on your student loans, the lender or guarantor may
use a collection agency to collect the
loan. The collection agency's costs are added to the amount due, and
the borrower is required to repay them in addition to the
amount due on the loan.
Federal regulations state that a borrower who has defaulted on his or
her student loans may be required to pay reasonable collection
costs in addition to other charges, such as late payment fees.
What constitutes reasonable is not very well defined.
Federal regulations concerning campus-based loan programs, such as
the Perkins Loan, suggest that collection costs may not reasonably
exceed 30% of the principal,Tiffany Charm Bracelet, interest and late charges
collected on the loan,Tiffany Alvord, plus any court costs, for first collection
efforts. For second collection efforts, the percentage increases to 40%. For Perkins loans made from 1981 through 1986, many promissory notes
limited collection costs to 25% of the outstanding principal and
interest due on the loan. Since then, however, promissory notes have
had no such restriction.
For loans held by the US Department of Education (e.g., Federal Direct
Stafford Loans),
the department assesses collection costs at a rate of 25% of the
outstanding principal and interest due on the loan (or 20% of the payment).
FFELP lenders are limited to a similar amount. For an analysis of the impact of these collection costs, see FinAid's Loan Default Calculator
and Collection Cost Impact Chart.
When consolidating a defaulted loan, collection costs of up to 18.5% of the
outstanding principal and interest may be included in the amount
consolidated. So a collection agency might be willing to reduce its
fees to 18.5% if the student consolidates his or her loans. But the
collection agency is under no obligation to do so. So if the student
consolidates his or her loans and the collection agency does not reduce its
fees, the student must pay the amount in excess of 18.5%.
If you work out a payment schedule within 60 days of default, some
collection agencies will waive or reduce the collection fee.
Overall, it appears that collection costs can legally be as high as 40%, perhaps even higher.
If you think the collection costs are excessive, you can ask the
collection agency to provide a detailed itemization of the actual
costs incurred in collecting the loan. Although federal regulations
are murky on this point, it appears that the costs must be based on
either the actual costs incurred in collecting the loan or the average
costs incurred for similar actions taken to collect loans in similar
stages of delinquency.
While state guarantee agencies are exempt from the Fair Debt Collection Practices Act (see also other FTC links about FDCPA
and the Fair Debt Collection Fact Sheet),
the for-profit collection agencies they hire are not and must comply
with the law. So be aware of the legal and illegal debt collection practices
and your rights under the law. In particular, you may be able to stop
the phone calls and letters by writing a letter to the collection
agency and telling them to stop contacting you. The collection agency
may then only contact you to tell you about specific actions they are
taking, such as garnisheeing your wages. Note that you are still
obligated to repay the debt even if the collection agency stops
contacting you about it. In particular, interest will continue to
accrue even if unpaid, often significantly increasing the size of the
debt.
Wage Garnishment
The federal government and guarantee agencies can garnish your wages
administratively. This is in contrast with lenders of private student
loans, who must obtain a court order to garnish your wages.
If a guarantee agency or the US Department of Education will be
garnishing your wages, they are required to provide you with 30 days
notice and to offer you the opportunity for a hearing. You have 15
days from the date the garnishment notice was mailed to file a
petition asking for a hearing. The hearing will be conducted by an
administrative law judge or other hearing official not under the
control of the guarantee agency. (Unfortunately,Tiffany & Co, this does not mean
that the hearing official is impartial.)
This hearing represents an opportunity to challenge the wage
garnishment. Borrowers should always demand proof of the existence of
the debt and the amount of the debt, such as a copy of the original
promissory note. Guarantee agencies often have very sloppy records and
may not be able to prove the existence of the debt. A computer
printout or similar business records do not represent proof that the
amount is owing. It's merely an assertion that the debt exists, not
proof that the debt is really owing. Borrowers should also ask for and
review a complete copy of the repayment history on the loan, as there
may be errors where payments were not properly credited to the account
or where payments are missing.
The Higher Education Act does not permit wage garnishment of borrowers
who have been laid off or fired from their jobs until they have been
employed for at least 12 continuous months.
Low-income borrowers should also verify the accuracy of the wage
garnishment amount. Most guarantee agencies set the wage garnishment
amount at 15% of disposable pay (gross income after subtracting
amounts required by law to be withheld) because that's the maximum
allowed by law. But the regulations and statute require that the
borrower be left with weekly earnings after the garnishment of at
least 30 times the Federal minimum wage. Sometimes this yields a lower
wage garnishment amount.
Offsets of Income Tax Refunds
If you have defaulted on your federal education loans, the federal
government or a state guarantee agency may intercept your federal and
state income tax refunds (or other payments from the federal
government) and offset them to satisfy the debt. They will send you a
notice within 45 days of paying a lender's claim on your defaulted
loans, and may not initiate an offset until 60 days after they have
sent this notice.
If your income tax refunds have been attached and your filing status
was married filing joint, you should ask for a hearing (administrative
review) and fight it
using the innocent spouse defense (sometimes called the injured spouse
defense). While the government has the right
to your income tax refunds, they do not have the right to your
spouse's share of the income tax refunds. (That is, unless he/she has
also defaulted on his/her student loans.)
If you have questions about a Treasury Department offset of your
income tax refunds, you can call 1-800-304-3107.
Default Rates
The US Department of Education uses three different definitions when
calculating default rates:
Cohort Default Rate. The cohort default rate is the
percentage of federal education loan borrowers who enter
repayment in one federal fiscal year and default before the end of the
next fiscal year. This short-term measure of defaults is used
to determine a college's eligibility to participate in federal student
aid programs. If a college has at least 30 borrowers entering
repayment and its cohort default rate is more than 40% in a single
year or more than 25% for three years in a row, it loses
eligibility. The cohort default rate is also used to determine whether
a college is eligible for an exception to certain rules. For example,
the requirements for a 30-day delay for first time borrowers and
multiple disbursements are waived for colleges with cohort default
rates of less than 10%.
The cohort default rate is a very weak measure of defaults. Given
that a default does not occur until a payment on federal education
loans is more than 270 days late, lenders have 90 days to file a claim on a default, and Stafford
loans do not enter repayment until the end of the 6 month grace
period, the cohort default rate is mainly a measure of the percentage
of borrowers who never begin making payments on their loans or stop
making payments within the first year of graduation.
The US Department of Education publishes official cohort default rates
for schools
and
lenders and guarantee agencies
on an annual basis.
The cohort default rates tend to correspond to the interest rates on education loans.
Budget Lifetime Default Rates. The Budget Lifetime
Default Rate is a projection of the percentage of federal education
loan dollars entering repayment in a federal fiscal year that
will default within the next 20 years. These default rates are
reported in the President's budget. The default rates can change
significantly from one year to the next (especially the differences
between estimated projected rates and "actual" projected rates). It is
unclear whether these changes are due to the sensitivity of the model
to inflation and other economic factors,Tiffany Diamond Earrings jhgjhg, changes in the model from one
year to the next, or political considerations.
Cumulative Lifetime Default Rates. The cumulative
lifetime default rate is the percentage of federal education loans that enter repayment in
a particular federal fiscal year and default before the end of the
current fiscal year. These default rates increase as the
number of years of data increase.
All of these default rates are based on the federal fiscal year, which
runs from October 1 to September 30. The federal fiscal year is offset
relative to the academic year, which runs from July 1 to June 30.
It is worth noting that these definitions of default rates differ on
several factors: Basis: Borrowers, Loan Dollars, Loans
Time Frame: 2 years, 20 years, from repayment inception
Institutional Category: different definitions based on
institutional level (< 2 year, 2 year or 4 year) and control (public, private,
proprietary, foreign) and borrower year in school (freshman/sophomore,
junior/senior, graduate student) These default rates are published annually in late November. For
example, the default rates through September 30, 2007
where published on November 30, 2007.
Two-year and proprietary institutions tend to have the highest default
rates, more than twice the default rates at four-year, public, and
private non-profit institutions. Graduate and professional students
have among the lowest default rates, about half the average.
Private student loans tend to have long-term default rates that are
about half of the default rates on federal education loans, partly
because they exclude most borrowers with credit scores below 650. The
federal government lends to a riskier population of borrowers because
the government is focused on enhancing access to higher education,
while private lenders are focused on profitability.
Defaulting on Private Student Loans
There are some differences between defaulting on federal student loans
and private student loans. While federal education loans define a default as
occuring after 270 days of non-payment, for private student loans a
loan is considered in default after 120 days of non-payment.
Private
student loans also have fewer tools for averting default. For example,
the forebearance period on a private student loan is usually no more
than a year, in six month increments. Most private student loans do
not have discharges for death or total and permanent disability of a
borrower. (Sallie Mae's Smart Option Loan, New York HESC's NYHELPs and
all Wells Fargo private student loans provide a death and disability
discharge.)
Private student loans cannot attach federal and state income tax
refunds or prevent the renewal of state licenses, but they can sue
under state loan to garnishee wages to repay a defaulted debt. They
are also excepted from discharge by bankruptcy unless the borrower
files an undue hardship petition that is granted by the court.
More Information
For information about the factors that contribute to default, see
Erin Dillon, Hidden Details: A Closer Look at Student Loan Default Rates,
Education Sector, October 23, 2007.
This report is based on data from a June 2006 NCES report and not on the official cohort
default rate data. The report's key findings are: Defaults are more likely to occur four years after the start of
repayment. Current cohort default rates are based on the first two
years of repayment.
Default rates increase with higher debt levels, with a nearly 20%
10-year default rate for students graduating in 1992-93 with more than
$15,000 in debt, more than twice the overall average default rate. Default rates declined with increasing income quartile, with the
lowest income quartile in 1994 more than four times as likely to
default as the highest income quartile.
Significant differences in default rates according to race, with
African-American students defaulting at four times the overall average
default rate and Asian students at less than half the overall
average.
See cohort default rates
for additional technical detail concerning default determination and
cohort default rates.
See loan cancellation and discharge forms
for the forms used to apply for a discharge for various reasons such
as total and permanent disability, school closure and identity theft.