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Default

What are the consequences of default?
If you default on your student loan, you face serious penalties:

  • Your school or lender will report your default to the national credit bureaus. You will be assigned the worst possible credit rating, which remains on your credit report for seven years after you pay your loan in full. This credit rating may have severe consequences on your ability to obtain a credit card or financing for a home or car.
  • Your loan may become immediately due and payable in full. You are not eligible for deferments, forbearances, or alternative repayment plans.
  • Your school or lender may turn your account over to a professional collection agency, in which fees and other additional costs are added to your principal balance.
  • Your wages may be garnished. federal regulations allow up to 10% of your income after taxes to be taken away until your loan is paid in full — without going to court first.
  • Your Federal Treasury payments (such as federal income tax refund and Social Security benefits) can be taken and applied to your defaulted loan. Your state income tax refund can also be taken.
  • You will not receive any federal or state student financial aid if you decide to return to school.
  • Your account may be assigned to the Department of Education, which may sue you.
  • You may be denied employment with a federal, state, county, city, or local government; or your existing employment with such agencies may be terminated.
  • You may be denied a professional license required for your profession.

What should I do if I have problems repaying my loan?
Contact your loan holder immediately if you're having problems making your student loan payments! Unlike other consumer debt, such as credit cards, you have options. You may be eligible for a deferment, forbearance, loan consolidation, or loan cancellation/discharge.

If you experience financial difficulties due to unemployment, illness, or other economic hardships, don't be embarrassed or afraid to ask for help. Your loan holder can talk with you about your options.

Also, you might consider contacting a local, non-profit consumer counseling organization for advice about managing all of your personal finances. Visit the National Foundation for Credit Counseling web site to locate an agency near you or to use their online debt advice service.


Deferment

Deferment is a period of time when you are not required to make payments on your loan. If you request a deferment and meet the criteria, your loan holder must grant your deferment request.

Interest continues to accrue on unsubsidized Federal Stafford Loans and Federal Parent Loans for Undergraduate Students (PLUS), though you are not required to make interest payments. If you do not pay the interest, it will be added to your principal balance when your deferment ends, increasing your total debt.

In addition to the deferment provisions in their promissory note, borrowers with an outstanding balance on a Federal Perkins, National Direct, or National Defense loan made prior to July 1, 1993, may now be eligible to receive deferment of repayment for periods of:

  • Unemployment;
  • Economic hardship;
  • Enrollment in graduate/post-graduate fellowship or rehabilitation training programs; or
  • Service that will be eligible for partial loan cancellation.

Tip: Request the deferment in writing from your loan holder. Be sure to submit all required documentation. Keep a copy of your deferment request form, and follow up with your loan holder until your deferment is granted or denied. Do not stop making payments until you receive a written notice that your deferment is granted.


Forbearance

Forbearance is a period of time when you are allowed to make lower monthly payments (sometimes interest payments only) or stop making payments.

Interest continues to accrue on all loan types, though you are not required to make interest payments. If you do not pay the interest, it will be due at the end of your forbearance agreement.

Your loan holder may grant you forbearance if you are willing but temporarily unable to make full or partial payments on your loan and do not qualify for a deferment. Under certain conditions, your loan holder may be required to grant you a mandatory forbearance.

Tip: Contact your loan holder to request forbearance. Keep a copy of your forbearance request form, and follow up with your loan holder until forbearance is granted or denied. Do not stop making payments until you receive written notice that your forbearance is in effect.


Consolidation

Consolidation is the process of applying for a new loan that will be used to pay off your existing student loan debts. It may allow you to pay your loan over a longer period of time, resulting in lower monthly payments, but greater total debt.

Tip 1: Talk with your loan holder about whether consolidation is a good option for you. They may be able to tell you the interest rate on a consolidation loan, your minimum monthly payment, and your total debt.

Tip 2: Married couples may consolidate their individual student loans. However, you would be eligible for a deferment or loan cancellation on your federal consolidation loan only if both you and your spouse meet the eligibility criteria. In addition, if one of you were to die, the other would still be liable for the consolidated loan, regardless of the amount of individual debt you consolidated. Even if you divorce, you are both responsible for the consolidated loan.

Loans eligible for consolidation include:

  • Auxiliary Loans to Assist Students (made before October 17, 1986)
  • Federal Insured Student Loans (FISL)
  • Federal Parent Loans for Undergraduate Students (PLUS)
  • Federal Perkins Loans
  • Health Education Assistance Loans (HEAL)
  • Health Professions Student Loans (including loans for disadvantaged students)
  • Nursing Student Loans (NSL)
  • Subsidized and Unsubsidized Federal Stafford Loans


Interest Rate

Generally, the interest rate on a Federal Consolidation Loan is the weighted average of the interest rate on the loans being consolidated, rounded up to the nearest one-eighth of 1% with a maximum rate of 8.25%. This interest rate is then fixed for the life of the loan. If you consolidate HEAL loans, the portion of the Consolidation Loan that repays the HEAL loans has a variable interest rate that changes annually.

The maximum time you are allowed to repay your Federal Consolidation Loan varies, depending on the amount of the loan and any outstanding amounts you owe on other educational loans that you do not consolidate.

Amount Years to Repay
Less than $7,500 10
$7,500–9,900 12
$10,000–19,999 15
$20,000–39,999 20
$40,000–59,999 25
More than $59,999 30