How do loans go into default?
Federal Direct or Stafford Student Loans
Students who graduate, withdraw or drop below half-time attendance have a six month grace period on their Federal Direct or Stafford loan before repayment begins. Students who do not begin to make payment six months after they graduate are considered delinquent. Default is usually declared after nine months of delinquency.
Federal Perkins Loans
Perkins loans have a nine month grace period for students who graduate, withdraw or drop below half-time enrollment. Default is declared if no payment is made within 270 days of the repayment due date.
Private loans are not subject to federal regulations. Students should confirm with their lender the grace period and repayment schedule. Default can be declared after missing just one payment at the discretion of the lender.
An important note: If you had loans and stopped attending school for any period of time or attended less than half-time for a period of time and then re-enrolled you may have already used your grace period on your early loans. You may be required to go into immediate repayment on these loans. Please check with your servicer.
What happens if I default on my federal loans?
Defaulting on a federal loan will have a negative effect on your credit rating. A negative credit history can result in being ineligible to buy a house or car. Some landlords request a credit history before allowing tenants to rent an apartment. And there are many employers who also require credit checks before hiring staff. So defaulting on a loan will have an impact on your life.
In addition the government can seize tax refunds, garnish your wages, and take a portion of Social Security payments—all without a court order. You may lose your professional license, and you will lose eligibility for new loans and grants.
Federal loans cannot be included in bankruptcy cases and will be your responsibility until they are paid in full or forgiven.
What is loan forgiveness?
Employment in some public service fields may qualify a borrower to have a portion of their loan forgiven (reduced). For more information on forgiveness programs please read the Q&A information on the Department of Education website.
If you have further questions please contact your loan servicer and they will provide you with appropriate direction.
How will I know to whom and when I should make my payments?
First and foremost, keep track of all of your loans. All of your federal loan information is available to you on the National Student Loan Data System (NSLDS). This can be found online. You will need your federal pin number to access your files.
As soon as you graduate, withdraw or fall below half-time, review your NSLDS file to see what loans you have. If you think there is a discrepancy, check with the department, lenders or school where the discrepancy appears.
For each federal loan you have outstanding the NSLDS system will provide you with the amount, the school where the loan was disbursed and the servicer of each loan. It will also provide contact information for all involved institutions.
It is important to make sure that every loan listed has your current and correct contact information. Servicers will contact you regarding your repayment provided they have the correct information. The responsibility for repayment is yours even if the lender has not been able to contact you because they do not have your correct information on file.
If you do not hear from your servicer(s) do not wait. Contact them at least 60 days before your grace period ends.
If you have multiple loans under both the Stafford FFELP program and Direct Lending you will likely have to make multiple payments. To avoid this you may want to consider consolidating. Please see the section on consolidating your loans.
What if I can’t make the payments?
If for any reason you are not able to make payment on your student loans, you must contact your loan servicer. There are many repayment options available if you need to lower the monthly amount. If you are not able to make any payment, there are deferment and forbearance options available.
It is not advantageous to anyone to have students default on their loans. The government, servicers, lenders and schools will all work to assist you with preventing a default.
As soon as you are aware that you will not be able to make payment contact your servicer. If you are employed but not making a sufficient salary to cover payment without hardship you will be instructed on alternative payment options. These options include Extended, Graduated, Income Based and Income Contingent repayment plans. Your servicer will help you with determining which is best suited to your situation. You may even change your plan throughout your repayment period depending on your financial situation. (Borrowers are usually permitted to review and change their plan annually.)
If you are unemployed and are suffering economic hardship then you may apply for a deferment or forbearance. Either of these options will allow you an extended time before you have to begin repayment without harming your credit rating. Each deferment or forbearance is time limited (usually for 6 months) and you will need to reapply if your financial situation does not change by the end of the agreed term.
If you are granted a deferment, any subsidized loans will not accrue interest during the deferment term. In forbearance you will not be required to make payment however, interest on all loans will continue to accrue.
What is the most important thing to remember?
Loan repayment is not fun but it has to be done. If you cannot make payment do not just ignore your debt thinking it will magically disappear. Be proactive and seek help. It is available to you.
Keeping a good credit rating does require diligence on your part but is worth the effort. Stay in contact with your servicer, take the time to complete any required paperwork and make payment when you can and it will pay off.