Section 5: Financial Aid:

Loan Default

Default is a legal term for a borrower’s failure to repay a loan according to the terms agreed to when they signed a promissory note. For the Federal Direct Student Loan Program, default occurs when a borrower fails to make a payment for 270 days under the normal monthly repayment plan.

Avoiding Default

• Consolidation
• Deferment and Forbearance
• Forgiveness, Cancellation, and Discharge
• Repayment Plans
• Steps to Avoid Default

Consequences of Default

The consequences of default are severe. The lender or agency that holds the student loan and the state and federal government will normally take legal action to recover the money the student owes. Other consequences include but are not limited to:

• The lender can notify national credit bureaus of the student’s default. This may affect the student’s credit rating for as long as 7 years. For example, the student might find it difficult to borrow money from a bank to buy a car or a home.
• The Internal Revenue Service can withhold the student’s U.S. Individual Tax Refund and apply it to the amount the student owes.
• The agency holding the loan may ask the student’s employer to deduct payments from their paycheck; this is known as wage garnishment.
• The student generally will be liable for loan collection costs.
• The student can no longer receive a deferment or forbearance, and if the student returns to school, they generally will not be eligible for additional federal aid.