What happens to my loan if I Default?

Guarantor. After you default on a federal student loan, your guarantor reimburses your lender for the default amount. The guarantor now owns your loan and will attempt to collect payments from you.

Collection agencies. Many guarantors and the U.S. Department of Education contract with private collection agencies to collect defaulted loans. Your account may be assigned to one of these collectors.

U.S. Department of Education. If your guarantor is unable to collect from you, your loans may be assigned to the Debt Collection Service of the U.S. Department of Education, which will continue to pursue payment from you.

For more information visit: Federal Student Aid Default information

Higher interest or denial of credit

Your credit can be seriously damaged if you default on your student loan.  The damage to you credit can affect the interest rate on future loans you are offered and can result in denial of credit opportunities you will receive

Collection fees and costs

When you have a defaulted loan, you are charged additional collection fees and costs associated with collecting your loan.  These costs can substantially increase your loan balance

Wages garnished

Under student loans rules a certain percentage of your income may be withheld from your pay and set to your loan holder to reduce the amount of your defaulted student loan.

IRS funds withheld

If you default on your student loan your loan holder can seize your tax refund and other federal payments to which you are entitled and apply them to your outstanding loan balance.

Legal action

In extreme circumstances the holder of a defaulted loan my take legal action against you to force you into repayment

Professional license withheld

You may be unable to renew your professional license as long as you have an unresolved defaulted loan.

No more federal financial aid

If you default on you student loan you will be ineligible for any further federal financial aid unless you make and fulfill satisfactory repayment arrangements with the holder of your defaulted loan and request reinstatement of your eligibility.

Options for Resolving Default

Payment in full. When you defaulted on your loans, the entire balance immediately became due.

Repayment arrangements. Because most borrowers who are in default cannot afford to make payment in full, your guarantor, the collection agency to which your account has been assigned, or the U.S. Department of Education can establish repayment arrangements with you. Typically, these plans require that you make at least six-consecutive, on-time, voluntary monthly payments.

Loan consolidation. Under certain circumstances, you can resolve your loan default by consolidating your outstanding loans. In some cases, you may be required to make a minimum number of payments, typically three payments, before you will be permitted to consolidate your loans. Once your consolidation loan is approved, your credit report will be updated to reflect that your defaulted loan is paid in full, although your credit report will continue to document that you previously defaulted on your loan. You will have to make the required payments on your new consolidation loan.

Loan rehabilitation. From the standpoint of cleaning up your credit report, loan rehabilitation is your best option. You must first make nine, voluntary, on-time monthly payments during a 10-month period.  After you have made your required nine monthly payments, your guarantor will assist you in locating a lender that will purchase your defaulted loan. Once your loan is rehabilitated, the reporting of your default will be deleted from your credit report, and you will have a new loan on which you will be making payments. Note that you may rehabilitate defaulted loans only one time.