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What is a Defaulted Student Loan?

You are said to have defaulted your student loan if you fail to repay a loan as anticipated during the issuing agreement. This comes with its consequences as the lender has every right to lawfully demand his money back. If a loan delinquency is detected in your student loan which normally happens when the loan is due for payment and no payment process has been started within the first 270 days for federal student loan and 120 days for private student loans, your loan is most likely to default. A loan delinquency is a failure to pay loans when they are due.

There are differences in defaulted loans when it comes to federal student loans and private student loans.

• Federal student loans default after 270days of non-repayment while private student loan default after 120 days of non-repayment.
• The borrower needs to file for a hardship petition in a court and be granted in order to be exempted from discharge by bankruptcy when it comes to Private student loans.
• Private Student loans companies cannot recover their money by using the tax refund or even prevent renewal of state licence. They can however claim through garnishing wages by taking legal action against the borrower under the state loan.
• In cases of borrowers death or disabilities the private student loans do not have discharges. However

What are the penalties of defaulting on a student loan?

• While in default your credit report is adversely interfered with rendering it bad. This can result to failure of getting jobs, credit cards, mortgages, auto loans and others where your credit report is required. At some point you may be ineligible to join the armed forces or much worse renew a qualified licence or fail to enjoy some social security benefits.
• The federal Aid benefit is immensely interfered with and a student can not qualify until full payment arrangements are made for the defaulted loan and this normally can take a long time.
• One way the Department of Education (Department) makes money is when the IRS takes the borrowers income tax refund until the defaulted loan is fully paid. You can stop this by writing to IRS before 65 days after being issued with the notification giving evidence of full arrangement of defaulted student loan payment settlement plans.
• You may be bombarded with wage garnishment where the employer sends upto 15% of your earnings towards your loan repayment.
• You may be denied a subsidized interest benefit.
• You may not be eligible for deferment (postponement of a loan refund) too.

How do you get out of Defaulted Loan?

As a borrower, approach your lender and make arrangements for loan repayment to cure your default. After making six consequent repayments within six months without fail, the borrower becomes eligible for federal student aid. By making 9-10 consequent and on-time payments a borrower can now apply for a rehabilitation program which will help clear the defaulted loan. The borrower’s loan is no longer in full status and immediately his credit report is updated and name cleared. After which, the borrower can now receive benefits like financial aid, no more wage garnishing and tax refund seizes. Eligibility for forbearance and deferment becomes possible as long as such options were not exhausted during default.

What to do to prevent a Default

Hardships or changes in a student life may affect loan repayment and may lead to defaulting. This can be prevented by understanding fully the guidelines into staying away from default including forbearance or deferment options on your loans since you are eligible if you are not in default. (Get more detailed information on preventing a default).

Useful Links and Tools

The National Student Loan Data System (NSLDS)
FSA Ombudsman of the Department of Education (Having Loan Problems)
Regaining loan Eligibility
Loan Default Calculator
Collection Cost Impact Chart Generator
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Loan Forgiveness
Private Student Loans

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