Defaulting on Student Loans
Defaulting on student loans is a serious matter that deserves a lot of consideration. Before you begin applying for student loans, it’s wise to learn more about the consequences of default, how to avoid it and, if you're already in default, how to get out of it. See also Trouble Repaying Debt or 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
Note that student loans are now generally not dischargeable through
bankruptcy. It is fairly
difficult to satisfy the requirements for an undue hardship petition.
Even if you satisfy the requirements of an undue hardship discharge, often this will result in just a
partial discharge of the debt.
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.
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.
- Your federal and state income tax refunds may be intercepted.
- The federal government may withhold part of your Social Security
- 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
- 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.
The Horrors of Defaulting on Education Debt
for a discussion of some of the more horrific consequences of
defaulting on student loans.
- 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.
- 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, the type of loan, the amount of the loan,
the interest rate, 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, such as change of address, 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. Ask your lender about these options while you are still making payments, before
you default on your loan.
- 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
- Consider using a consolidation loan to combine all of your
educational loans into one big loan.
- 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.
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.
Students can postpone the interest payments on such loans by capitalizing the interest, which increases
the size of the loan.
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 and economic hardship.
These deferments are for the FFELP and FDSLP loans, not the Perkins loan.
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.
During forbearance, the lender allows you to postpone
or reduce your payments, but the interest charges continue
to accrue. You must continue paying the
interest charges during the forbearance period.
Forbearances are typically granted in 12-month intervals for up to
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.
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.
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 and 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, 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.
If you default on your student loans, the lender or guarantor may use a collection agency to collect the loan, which is stated in federal regulations. 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 concerning campus-based loan programs, such as the Perkins Loan, suggest that collection costs may not reasonably exceed a certain percentage of the principal, interest and late charges collected on the loan, plus any court costs, for collection efforts.
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).
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.
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. Note that you are still obligated to repay the debt even if the collection agency stops contacting you about it.
Also, see FinAid's Loan Default Calculator and Collection Cost Impact Chart.
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.
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. 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, 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.
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.
Defaulting on Private Student Loans
While federal education loans define a default as
occurring 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 forbearance period on a private student loan is usually no more
than a year, in six month increments.
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 exempted from discharge by bankruptcy unless the borrower files an undue hardship petition that is granted by the court.
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.
Other helpful web sites include: