Default occurs if you fail to make timely payments. Once a student loan goes into “default” status the full balance of the loan becomes due immediately. It also means that other options for delaying payment, including student loan deferment and forbearance, can no longer be used. Furthermore you will be ineligible to obtain student aid should you wish to continue your education.
Before that happens, realize this: you have options.
Federal student loans are loans that are guaranteed by the Federal Government. Federal Student Loans were established in 1965 pursuant to The Higher Education Act (HEA). The Higher Education Act is a federal law that governs the administration of federal student aid programs. The HEA was originally passed in 1965 and signed into law by President Lyndon B. Johnson.
Federal student loans are available to students to help pay for their education. Federal student loans often have lower, fixed interest rates, generous repayment plans, no prepayment penalties and in some cases can be obtained without a credit check.
Private loans in most cases carry higher interest rates and are more expensive than federal student loans. The higher, (and in some cases variable interest rates) may substantially increase the total amount you must repay. Private loans can also have prepayment penalty fees.
If your bank or other similar financial organization provides loans backed by the federal government, they are likely participating in the FFEL program. (Be sure to ask). Documents for a federal student loan will state somewhere on the form that it is a federal student loan. Some private student loan lenders employ forms that look similar to the federal forms and might confuse some students.
The Higher Education Act (HEA) is the federal law that governs the administration of federal student aid programs. The HEA was originally passed in 1965 and signed into law by President Lyndon B. Johnson. To encourage growth and change, it must be re-approved, or “reauthorized,” by Congress approximately every five years. In addition to major reauthorization bills, Congress also considers many bills that may directly or indirectly impact the HEA.
The three most common types of loans are the Stafford Loan, the PLUS Loan (including the Grad PLUS Loan) and alternative student loans. While there are no absolute ways to determine which student loan programs are best, there are some general guidelines and areas that will help to help you choose the most affordable loan option.
Interest Subsidy — Subsidized loans (in which the government or other agency) are far better than unsubsidized loans (in which interest must be paid by the borrower from the loan’s disbursement).
Lowest Cost — The loan’s interest rates and fee structure determine the amount of a loan’s finance charges. Some loans (like mortgages) allow you to pay up-front fees in exchange for a lower interest rate. You should consider this feature in relation to how long you plan to repay the loan. The loans with a longer repayment period are often less expensive with lower interest charges and a slightly higher up-front fee.
Interest rate options — Programs offer different interest rate options. Some are fixed and stay the same over the life of the loan. Some are variable and tied to the Prime interest rate (or other index). When the interest rate changes also varies among programs. Some change annually, some quarterly and some as often as monthly.
Flexibility — Consider the repayment options offered. Are payments required during repayment? Can the principal be deferred? Are alternative repayment programs (graduate repayment or income sensitive, for example) offered?
- Direct Subsidized Stafford Loans
- Direct Unsubsidized Stafford Loans
- Direct Plus Loans
- Direct Plus Unsubsidized Consolidation Loan
- Subsidized Federal Stafford Loans, formally Guaranteed Student Loans (GSL)
- Unsubsidized and Nonsubsidized Federal Stafford Loans
- Federal Nursing Loans
- Federal Perkins Loans
- Federal Parent Plus Loans
- Subsidized Federal Consolidation Loans
- Unsubsidized Federal Consolidation Loans
- Federal Supplemental Loans for Students
The federal government offers two types of consolidation loans to allow students for students to combine different types of federal loans to reduce and simplify payment. The two programs are a Federal Family Education Loan (FFEL) and the Federal Direct Consolidation Loan (Direct Loan).
Federal Direct Consolidation Loans are designed for those who can afford to repay their existing student loans. Borrowers make monthly payments based on yearly family incomes. Borrows with family annual incomes of less than $900 above the poverty level need not make any payment on the loan. Once you get the loan, the old loans disappear. You are eligible for new loans, grants, and deferments. You will no longer be listed as in default on credit records, and will not be subjected to tax intercepts, garnishments, or other collection efforts.
A Direct Loan has several advantages over the FFEL. Included are:
it is easier to qualify because it is unnecessary to make three regular payments before qualifying as is required to obtain a FFEL, the Direct Loan offers lower payments than a FFEL, borrowers with Direct Loans may be in a better position than those with FFELs in seeking deferments.
Direct Loans offer somewhat lower interest rates over the life of the loan that those offered by a FFEL
Some Direct Loan borrowers, due to their low incomes, may be making no or very low payments. These low payments may not cover accrued interest. The amount of the loan is increased to include the unpaid interest. After interest is charged on the accrued interest, the loan balance can increase significantly.
There are some positive features of the Direct Loan program; however, than offset some of these negative facts.
borrowers may seek loan deferments during which period, the government pays the accrued interest, a cap is placed on interest to keep it under control, after 25 years of payments (even if payments were zero over the entire time period) the loan is forgiven. However, periods of deferment or forbearance, during which the borrower is excused from making payments, are not counted. Note: when the loan is forgiven, the amount of the loan has to be counted as income on your tax return.
This may be difficult to hear, but in most cases bankruptcy is not a viable means to discharge your Federal Student Loans. Under certain and specific circumstances you can discharge your obligation to repay a student loan in bankruptcy. The criteria are set out at 11 U.S.C. 523 (a) (8). For example your loan may be discharged only if the first payment became due on the debt at least seven years before the bankruptcy was filed. So unless this is the case in your situation bankruptcy will not resolve your defaulted student loans.
Generally speaking, (for approximately 95% of student who hold Federal Education Loans) there are only two ways to avoid paying a loan issued under Title IV of the Higher Education Act; Death or Disability, which are not very ideal choices.
For your information, a Federal Education Loan issued under Title IV of the Higher Education can be canceled if you die or become permanently and totally disabled. However you cannot be considered disabled on the basis of a condition that existed when you applied for the loan unless it has substantially deteriorated. Stafford, PLUS, and SLS loans disbursed after January 1,1986, can be canceled under two additional circumstances:
- the school you attended improperly certified your ability to benefit from the training given, or
- the school you attended closed while you were in attendance or within 90 days after you withdrew from the school.
In addition to the above reasons, a National Defense Student Loan can be canceled if you enter into full-time teaching or military service.
A National Direct Student Loan and a Perkins Loan can be at least partially canceled under two more additional circumstances:
- becoming a Head Start Program Staff Member
- or a Peace Corps Volunteer.
A Perkins Loan can be at least partially canceled under 5 different additional circumstances:
- As a Peace Corps or VISTA Volunteer,
- As a full-time law-enforcement or corrections officer for loans received after 11-29-90
- Entering a full-time teaching position
- Becoming a full-time nurse or medical technician for loans disbursed after 7-23-92, or
- As a full-time employee of a public or private nonprofit child or family services agency if your loan was disbursed after 7-23-92.
First find out who is currently holding your loan. Check the collection notices that you have been receiving. Additionally you may call the Federal Student Aid Information Center at 1-800-433-3243 (1-800-04-FED-AID). If the guarantor agency has the loan you should deal with it. If the Department of Education is holding the loan, deal directly with the Department. If the Department has referred your loan to a collection agency, inform the agency in writing that you are contesting the debt by filing for a discharge of the Department of Education. If you defaulted on a Perkins Loan, it may still be held by your college and you should contact it for more information.
To apply for discharge or cancellation you must submit a written request with a statement made under penalty of perjury indicating:
you received at least part of your loan after 1-1-86, and whether you have made a claim relating to the loan to the a state tuition coverage program or surety for the school, and so, the amount of any recovery, and you agree to cooperate with the Department in any action to recover money related to the loan from third parties (like school-owners or their affiliates), and you agree to provide other reasonably available documentation, if requested.
You will also have to attest to other matters specific to the reason you are seeking the discharge. For example, you will have to give information regarding school closing or false certification if you are seeking cancellation on either of those grounds.
As per The Higher Education Act you may qualify for discharge, if your school (or the branch which you attended):
- closed while you are still either enrolled or
- on an approved leave of absence, or
- you withdrew from the school within 90 days of its closure.
However after the school closed, you must not have completed the program of studies through a “teach out” at other school or by transferring academic credits or hours earned at this closed school to another school.
A school’s closure date is determined as the date when it ceased offering all programs, not when it stops offering the particular program in which you were enrolled. The Department of Education determines the closure date, which you can find out from Department’s Cumulative List of Closed Schools. The Department’s list is not always accurate so you may have to prove an earlier closing date utilizing other means such as newspaper accounts or correspondence with the school.
If your loan is discharged, you will no longer owe any future payments, and you should be eligible for a refund of past payments. Moreover, the servicing agency will inform credit reporting agencies the loan was discharged. Thereafter any payment history impacting your credit report should be expunged. You will be eligible to obtain federal student financial aid.
If you do not have a high school (or equivalent) diploma, and were admitted to a school after July 1, 1987 you may be eligible to obtain a false certification discharge. The United States Department of Education may determine the school falsified your ability to benefit in the program unless you established one of the following:
- passed an “ability to benefit” test,
- successfully completed a program of developmental or remedial education provided by the school, or
- enrolled before July 1, 1991 and received at GED before completing your program of instruction.
- If your loan is discharged, you will no longer owe any future payments, and you should be eligible for a refund of past payments.
Moreover, the servicing agency will inform credit reporting agencies the loan was discharged. Thereafter any payment history impacting your credit report should be expunged. You will be eligible to obtain federal student financial aid.
ARE THERE PENALTIES FOR EARLY PAYMENT, OR IF THE LOAN IS PAID IN FULL BEFORE SCHEDULED (DEFERRED) PAYMENTS BEGIN?
There are never early payment penalties for federal student loans.
The standard repayment term for this loan is 10 years. You may be able to extend repayment by deferring or consolidating your Stafford loans.
You can choose one of the following plans:
The Standard Repayment Plan requires you to pay a fixed amount each month based on your principle and interest but will be no less than $50 or the interest that has accrued.
The Graduated Repayment Plan allows you to make lower payments at the beginning of repayment then, over time, your payments begin to increase. Each of your payments must equal the interest accrued on the loan between scheduled payments and initial payments general cover interest only for the first few years.
The Income-Sensitive Repayment Plan bases your monthly payment on your yearly income and your loan amount. Payments may change as your income rises or falls.
The Extended Repayment Plan is for borrowers with loans totaling more than $30,000. This plan offers a choice of fixed or graduated payments over a period of up to 25 years.
Federal Family Education Loan (FFEL) allows borrowers consolidate several loans with various repayment schedules into one loan. As a result there will be just one monthly payment. Credit bureaus will be notified that your account has a zero balance. You will sign a new promissory note with a new interest rate and repayment schedule.
To qualify you must first be in “repayment” status on your defaulted loan (that is, you must make three voluntary, on time, regular monthly payments).
You become eligible for other federal education loans. As with the Direct Loan you must give your consent to the IRS to disclose to the Department of Education certain income tax information. This information is necessary in order to calculate a monthly repayment plan based on your income which you must agreed to accept.
The monthly payments on a FFEL must, at a minimum, equal all interest as it accrues, while Direct Loan monthly payments may go as low as zero. An order to receive a Direct Loan you must certify that you the there could not obtained and FFEL or get one with a repayment plan satisfactory to you.
There are some disadvantages to getting either a Federal Family Education Loan (FFEL) or a Federal Direct Consolidation Loan (Direct Loan). As noted above, you may be able to bankrupt your student loan seven years after the first payment became due. A loan consolidation may start the seven-year time period running again. Moreover, if you are considering challenging the loan, a consolidation loan may waive some defenses if you later contest the loan in court. If you believe you may be going to court to fight against a loan, or are considering bankruptcy, you should consult a lawyer before applying for consolidation.
Another disadvantage of consolidation is that while you cure the default by consolidating a loan, your credit continues to show that at one point you were in default. . If you “rehabilitate” a loan instead, any reference to the default is removed. Also after consolidation collection fees become part of the loan principle.
Finally, borrowers may have more opportunity to compromise the amount owed on old loans than on a consolidation loan. To compromise the amount owed means you negotiate repayment of lower amount than the total owed. However, this usually requires a lump sum payment of a major portion of the loan. Most low income people cannot afford the lump sum payment.
There are two ways to temporarily stop making payments and/or to avoid a default; Deferment or Forbearance. You may request the United States Department of Education to grant you a “deferment” which allows you to stop payments (and stop interest from accruing as well). You must meet specific criteria in order to qualify for a deferment. You may request the guarantor agency for a forbearance of payments for short period when poor health or personal problems which affect your ability to pay. Interest continues to accrue during forbearance.
Deferment is a tool available to borrowers to help them meet their loan repayment obligations. Under Deferment, borrowers are permitted to discontinue payments. In Deferment, interest does not accrue. You must meet specific criteria in order to qualify for a deferment.
If you have trouble making your student loan payments, you might qualify for payment relief through a federal student loan deferment. A deferment is a temporary suspension of federal student loan payments for specific situations, for a specific period of time.
Stafford and Perkins loans:
Principal and interest payments may be deferred while the borrower is:
- Attending school at least halftime.
- Unemployed (up to three years).
- Studying in an approved graduate fellowship or rehabilitation program for the disabled.
- Experiencing economic hardship (up to three years).
- Parent Loan for Undergraduate Students (PLUS)
PLUS deferment options are based on the parent borrower’s eligibility – for example, if the parent is unemployed, not the student on whose behalf the parent took out the loan. Federal student loan deferment may take place for principal and interest payments while the parent borrower is:
- Attending school at least halftime.
- Unemployed (up to three years).
- Studying in an approved graduate fellowship or rehabilitation program for the disabled.
- Experiencing economic hardship (up to three years).
Please note: Federal student loan deferment does NOT lock interest rates. Even though loans are deferred, they can still have variable rates unless a loan is being deferred that was also consolidated (which has a fixed interest rate). Stafford loans borrowed prior to July 1, 2006 have variable interest rates, while Stafford loans borrowed after July 1, 2006 have fixed interest rates.
If Stafford loans have been consolidated then the interest rate will remain fixed. Deferment has no effect on the interest rate of a loan.
There are two sets of standards for obtaining deferments, depending on whether your loans were disbursed before or after July 1, 1993. The standards adopted for loans disbursed after July 1, 1993 tend to be viewed as more generous.
Deferment Standards for loans disbursed after July 1, 1993:
The maximum unemployment deferment period is increased from two to three years. A new three-year deferment category called “economic hardship” was created which supersedes the former three-year deferment for specified types of financial hardship (i.e. temporary total disability, primary caregiver for a disabled dependent, parental leave, and mother with preschool children at or near minimum wage). Furthermore those who receive public assistance, automatically qualify.
Some of the more important grounds for deferral of loans disbursed prior to July 1, 1993 are:
- unemployment (maximum of two year deferment),
- full-time student at participating school,
- active duty status in the U.S. Armed Forces,
- receiving, or being scheduled to receive service, under a program designed to rehabilitate disabled individuals,
- temporary total disability,
- providing nursing or similar services to a spouse who is temporarily totally disabled,
- parental leave, and
- being a mother of preschool children starting work at no more than $1.00 above the minimum wage
Forbearance is a tool lenders can use to assist borrowers in meeting their loan repayment obligations. By granting forbearance, a lender permits a temporary cessation of payments, allows an extension of time for making payments, or temporarily accepts smaller payments than were previously scheduled.
Under forbearance interest continues to accrue. Accordingly the outstanding debt could increase during forbearance. However, forbearance is not available when the loan is in default. Lenders are encouraged to grant a forbearance to prevent a borrower from defaulting on their loan repayment obligation. Lenders must grant forbearance when your debt exceeds 20% of your gross income.
Under certain circumstances a lender must grant forbearance for one year and shall renew it for a second and third year under certain conditions. Moreover, the fact that you are granted a forbearance cannot be the cause of a negative credit report and no fees can be charged.
Forbearance is a way to temporarily postpone or reduce your student loan repayment for a set period of time. This typically takes place because the borrower is experiencing financial difficulty, but can be requested for any of the following reasons:
- Partial Disability
- Other documented hardship
Even if the borrower is ineligible for a deferment, he/she can still receive a forbearance. Unlike deferment, it doesn’t matter if these loans are subsidized or unsubsidized because interest still accrues, and the borrower is responsible for the interest repayment.
The borrower’s loan holder can grant forbearance in intervals of up to 12 months at a time and for up to a total of 3 years. In order to enact federal student loan forbearance, it must be applied for through the loan servicer and payments must still be made until forbearance has been granted.
Federal PLUS Loan Forbearance
Federal PLUS Loan borrowers normally have the same eligibility requirements and procedures for requesting a forbearance that Stafford Loan borrowers do. However, because all PLUS Loans are unsubsidized, interest will be charged during periods of forbearance.
Please note: federal student loan forbearance does NOT lock interest rates. Even though loans are deferred, they can still have variable rates unless a loan is being deferred that was also consolidated (which has a fixed interest rate).
Stafford loans borrowed prior to July 1, 2006 have variable interest rates, while Stafford loans borrowed after July 1, 2006 have fixed interest rates. If Stafford loans have been consolidated then the interest rate will remain fixed. Forbearance has no effect on the interest rate of a loan.
The United States Department of Education encourages lenders to grant forbearance if you are in poor health or other personal problems affect your ability to make scheduled payments.
Forbearance is not as helpful as a deferral because interest continues to accrue while the loan payments are reduced or postponed. The size of the outstanding debt could actually increase during a forbearance period.
Unfortunately forbearance is limited to loans held by lenders. It does not apply if the loan has been taken over by guaranty agency or the United States Department of Education.
Yes! In this economic environment, the government agencies and/or their collection representatives have become even more aggressive in the collection of monies due. Although there are laws to protect your rights in debt collection, there are many collection agencies that are very aggressive in their collection tactics. You may experience high pressure phone calls at both home and work that can be disruptive and frustrating. Most employers take a very negative attitude toward their employees receiving collection calls at work. Tactics used by these agencies can include:
Garnishment of wages: This is a popular tactic of agencies and collectors to collect on student loans. It is a simple process for wages to be garnished for a student loan and it guarantees them to collect monies owed, unless you quit or lose your job. They do not need to go to court to start garnishing your wages. You could be facing a percentage of your pay being taken every pay period in an amount that is much higher than what your normal monthly payments would be. Even if you cannot live on the balance of your paycheck, they can take the garnishment anyway.
Recent government rules have made it even more difficult to resolve a student loan once it is in garnishment. If you are facing the possibility of garnishment, don’t wait to call, we can usually stop it before it starts, depending on where you are in the garnishment process. If you are already being garnished we can almost always stop the garnishment, depending on the agency you are being garnished by. Call today to find out how we can help.
Heavy penalties & high collection charges: Defaulted student loans carry heavy penalties that can quickly increase the balance of your student loan and double or triple the amount owed in just a few years. When the student loan goes into default, there is a twenty five percent default fee that is attached very quickly. If you loan just went into default, or is about to go into default, we may be able to help you avoid this fee. In addition, agencies will add continuing collection charges raising your cost even higher. With these kinds of costs you could pay on your student loan indefinitely! Stop your loans from growing out of control with our program.
Loss of Income tax refund: Seizure of your income tax refund is another very common practice of student loan guarantors and collection agencies. Our program will stop this from happening.
Derogatory credit rating: One of the most detrimental entries on your credit report is that of a defaulted student loan. You may not qualify for a home mortgage or may pay an extremely high penalty to qualify. If you can qualify for an automobile loan or other financing, you will be penalized with extremely high interest rates. As long as you owe the funds, the negative entry could stay on your credit reports indefinitely! With our program, your default will be either be eliminated on your report or your defaulted student loan will be reported as paid in full. We can help you begin to rebuild your good credit again.
Revocation of Driver’s License and/or Professional License: Many states are now revoking or refusing to renew driver’s licenses and/or professional licenses of individuals who have defaulted student loans. Eliminate this possibility with our program.
Lawsuit initiated by the Federal Government: In addition to the defaulted status on your student loan, you could be summoned to court by the federal government resulting in a judgment being placed on your record, damaging your credit even further. These judgments can be renewed every seven years. You could avoid a lawsuit by taking care of your student loan through our program.
Ineligibility for additional financial aid: As long as you have a defaulted student loan, you will be ineligible to receive any additional financial aid or student loans to continue your education. Once your student loans are out of default, you will once again become eligible.