What Is Default?
Default is a serious matter for your financial future. It means you’ve failed to make payments on your student loan according to the terms you agreed to when you took out the loan. If you don’t make monthly payments on your federal loan for 270 days, your loan will be in default. Federal Family Education Loan (FFEL) Program loans that require payments less than once a month will enter default if a payment hasn’t been made for 330 days. Private student loans follow different rules. Depending on the lender, you can default sooner—sometimes after 180 days of nonpayment. Review your loan paperwork or ask your lender about the default process to learn the terms of your loan.
Consequences of Defaulting
There are a number of severe consequences for defaulting on your student loans:
- The entire unpaid balance of your loan is immediately due and payable.
- Eligibility for deferment, forbearance and repayment plans is lost.
- Eligibility for further federal student aid is lost. Your loan is assigned to a collection agency.
- Your loan is reported delinquent to credit bureaus (usually occurs at 90 days delinquent for federal loans before the loan is in default).
- Your loan debt will increase due to late fees, additional interest, court costs, collection fees, attorney’s fees and other fees due to the collection process.
- Your employer may withhold pay from you at the request of the federal government through wage garnishment to pay your debt.
- Part of your Social Security benefits payments may be withheld.
- If you’re a federal employee, 15% of your disposable pay may be garnished by the U.S. Department of Education.
- The loan holder can take legal action against you.
- You may not be able to renew a professional license.
- You may be prohibited from enlisting in the armed forces.
While private lenders don’t have all of these options available to them when a loan defaults, they can still take legal action to pursue payment.
If you default on your loan, the first step you should take is contacting the collection agency billing you. By contacting the loan holder, you can explain your situation fully and ask about options to get out of default.
The Long-Term Effects
Defaulting on your loan will affect you for many years to come. One of the biggest ways you’ll be affected is with a damaged credit rating. Your credit rating affects your ability to get a credit card, buy a car or house, rent an apartment, register for utilities or even get a job. Defaulted loans appear on your credit history for up to seven years after the default claim (loan amount plus collection costs) is fully paid off.
In addition to being subject to forced collections, you’ll also be ineligible for assistance under many federal benefit programs. By making repayment arrangements with the loan holder, you can prevent many of these consequences.
After default, you also become ineligible for more federal financial aid until you repay the loan in full or arrange to pay what you owe and make six on-time monthly payments.
Most of all, having to quickly repay the full loan, accrued interest and fees will negatively affect your finances for years to come.
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