Defaulted Student Loans

Delinquency

Being late on a payment toward your loan is known as being delinquent on a payment. This could mean that your payment is only one day late. Nobody’s perfect. Maybe you forgot to update credit/debit card information, or switched jobs and needed an extra week to satisfy a payment. Whatever the case delinquency is not something to take lightly. To receive a Federal Student Loan, you must first sign and date a legally binding promissory note. The promissory note is written agreement between yourself (the borrower) and the Department of Education or the school/university from which your loan is being applied for. This agreement is important because it is the only way the lender protects themselves for repayment on a Federal Student Loan. Most private loans will require a credit check and more. Since there is no credit check for a Federal Student Loan, your signature on the promissory note maybe the only means of expecting or guaranteeing repayment on this loan.

This promissory note will usually contain the loan amount, interest rate, repayment schedule (due dates), and important information for making payment arrangements if ever you are not able to adhere to the agreed upon repayment schedule.

Defaulting on a Federal Student Loan

A payment that is more than 240 days behind schedule is no longer just delinquent, but is now considered in default. Defaulting on your Federal Student Loan will report negatively on your credit and may result in difficulty receiving loans or other lines of credit in the future. Even once you bring the loan back into good standing, or pay it off, your credit may report for some time that there was once a defaulted loan in your history.

If your Federal Student Loan is defaulted on, and the default status remains unresolved, your account may be turned over to a collections department, or third party collections company. There will be options for you to get the loan back in good standing or to just pay the loan off in full. Defaulting can make repayment of your loan far more difficult a process. Not only are you still responsible for paying the loan off, but you will now need to bring it back into good standing first. You may lose the privilege of placing holds on the payments due to your loan or even face wage garnishment or Federal Tax offset.

Forbearance and Deferment

There are usually a couple of options in placing your monthly payments on a brief or extended hold. Deferment is offered during a period of active enrollment in school with at least half-time attendance, or a the time a student is deployed. Loans can be deferred for lengthy amounts of time. Forbearance is another type of hold that can be requested by the borrower. A forbearance is granted by request when there is an economic hardship (loss of employment), or change in income that leaves the borrower unable to make payments for some period of time. Forbearances are usually applied for shorter amounts of time (2-3 months in most cases).

Defaulting on your payments will cause you to lose these options. In  many cases, the request for a deferment or forbearance is made to late and payments have fallen too far behind for these options to benefit the borrower.

Wage Garnishment

If you have allowed your Federal Student Loans to default and the matter remains unresolved, you may face wage garnishment. The Department of Education can have your taxable wages garnished for up to 15 in efforts to recover the loan. A garnishment can last until the loan balance is paid in full. This may mean a borrowers wages are garnished continuously because, the garnishment is generally covering penalties and fees due to the payments being so far behind and may never even touch the principal balance or interest that is accruing to the loan. With an order for wage garnishment against you, you lose the ability to direct consolidate your Federal Student Loans and will have to recover the loan through the rehabilitation process first. Once good faith efforts are made on the part of the borrower to get the loan back in good standing, a Direct Consolidation and IDR repayment plan may be a good way to keep the loan on track through the repayment period.

Tax Offset

Another way that the Department of Education will recover on a defaulted loan is by an offset (garnishment) of your Federal Tax Return. In this situation, The Department of Education will have the IRS apply your Federal Tax Return, often times in full, to your defaulted Federal Student Loans. If you are married .and filing jointly on a Federal Tax Return, this offset will apply to your spouse as well. The spouse may have a Federal Tax Return penalized even if they did not co-sign or reference your Federal Student Loan. Again, you may find yourself in a serious and time demanding situation to get the loan(s) back in good standing. You would need to consider loan rehabilitation, a direct consolidation and and IDR to recover.

No further Federal Student Aid

By showing an inability or unwillingness to stay in repayment on your Federal Student Loans, you lose the option of future assistance from Federal Student Aid. If you are defaulted on a Federal Student Loan, you will not be allowed another loan or even a grant to complete your education. This could cause a huge burden as millions of students rely solely on grants or loans to pay for their education. Some find themselves trapped under the Federal Student Loan and without a degree to further assist them in higher income and a better chance at repaying the loan(s).

Debt Collections

Unresolved, defaulted loans are sold out to Debt Management and Collection Systems or another third party collections agency. If your loans are placed with collections you will be vigorously contacted by phone and in writing to settle the debt. You will also notice a higher loan balance as several penalties and fees will be added to your account during this time. In many cases, the collections fees and accruing interest on the loan may be higher than the monthly payment amount. This will quickly case the loan balance to grow. In this situation it may seem that the loan will never be settled as it can grow drastically and double or even triple over time. You can avoid this great stress and confusion, by seeking assistance if needed and being realistic about your repayment needs.

Need help getting out of default

Loan Rehabilitation

You may choose the route of loan rehabilitation to pull your loan(s) back into good standing. This mean you will enter into agreement to make nine months of on time, voluntary payments with in a consecutive 10 month period. These nine payments are considered reasonable payments as long as they are no higher than 15 of your annual discretionary income divided by 12. Though this is the recommended calculation for a loan rehabilitation payment, it can be adjusted due to financial hardship and in many cases can be reduced down to only $5/month.

Loan rehabilitation is usually needed if there is a wage garnishment or Federal Tax offset in place. This may mean that you are making a reasonable voluntary payment for nine months while you are being garnished as well. Satisfying the terms of the loan rehabilitation program will remove the default status from your Federal Student Loans and therefore end the garnishment or offset. This is good new, although it may be hard for the borrower to understand that they have to make these voluntary payments while still having upto 15 of their wages garnished.

In many cases the loan holder will end garnishment after seeing a pattern of on time rehabilitation payments (even before rehab is completed). Keep in mind that it is not until the rehab is completed that the default will be removed.

Direct Consolidation

After completing the nine months of loan rehabilitation, a great option is Direct Consolidating your loans through the Department of Education. Loan consolidation allows you to pay off one or more Federal Student Loans by consolidating them into one new Direct Consolidated Loan. To be afforded this option you must agree to one of the following:

• Use an income driven repayment plan (IDR) to pay off the new Direct Consolidated Loan.
• Make three voluntary, on-time, consecutive monthly payments, in full. This is done while the loan is still defaulted, and then you can apply to have your loans direct consolidated.

Using a Direct Consolidation to repay on your Federal Student Loans often allows you an opportunity to move into the hands of a new service. This may give the borrower the feeling of a brand new start. New servicer, new loan, new chance to stay current on this financial responsibility. A general direct consolidation will give the option of several repayment plans. However, when coming out of a default it is beneficial and often even mandatory that you agree to the terms of an Income Driven Repayment Plan (IDR). Keep in mind payments can be reduced as low a $0/month based on your AGI and family size.