What if You Default?
You should try to avoid defaulting on your student loans. A default will negatively impact your credit score and your ability to obtain credit in the future. But if you are unable to avoid default, you may have options to help repair your credit and get you back on track. You can consider contacting your servicer to discuss your options and ask them to work with you toward a sensible solution.
While each person's particular situation is different, below you will find some general information regarding default and your post-default options:
Default – Federal Student Loans
Most federal student loans go into default after nine months (270 days) of non-payment. You may face the following consequences if you default on your federal education loans:
- Your unpaid loan balance and accrued interest are immediately due and payable.
- You will no longer be eligible for deferment or forbearance.
- You cannot receive new federal student aid while an existing federal student loan is in default.
- Your loan may be assigned to debt collector for collection.
- You may be sued to recover the debt.
- Your wages can be garnished. (The amount deducted from any pay period may not exceed 15% of your disposable income without your consent. You have the right to a hearing if you dispute the existence or amount of the debt due).
- You can lose your tax refunds (which will be applied toward your loan debt).
- Your credit may be negatively impacted.
- For certain loans, the Department of Education may require you to make payments under the Income-Based Repayment (IBR) plan or Income Contingent Repayment (ICR) plan.
You have rights under New York State and federal law when dealing with debt collectors. Contact DFS if you believe that a debt collector has violated the law.
Federal Loan Payment Plans (Post-Default)
You have the following general options once you default on your federal student loans:
- PAY IN FULL: If you can afford to repay your defaulted loan in full, you have the option of doing so. The loan debt will be fully wiped out, but your credit report will still reflect that you paid off a defaulted loan. Paying the loan in full will also restore your eligibility for federal aid.
- REHABILITATE: You can rehabilitate your loan by making a series of timely payments that you can afford. By doing so, your loan will be returned to its pre-default status. Loans rehabilitated after August 14, 2008 can be rehabilitated only once - if you default on a loan that you have already rehabilitated, you cannot rehabilitate that loan again. Some considerations when looking at rehabilitation are:
- Affordable Payments: There is no minimum payment required for rehabilitation. Payments are affordable and based on your total financial circumstances.
- Restored Loan Benefits: If you rehabilitate your loan, you can again become eligible for loan benefits that you had prior to default, including deferment, forbearance, loan forgiveness, and federal aid eligibility.
- Increased Cost: After you rehabilitate your loan, collection costs may be added to your loan and your monthly payment may increase.
- Credit: If you rehabilitate your loan, the default will be removed from your credit report, but late payments reported prior to your default might remain on your credit report.
- CONSOLIDATE: In certain circumstances, you can consolidate your defaulted loan or loans into one new Direct Consolidation loan with a fixed interest rate. Your consolidation loan takes the place of all of your old loans, which are paid off in full. When looking at consolidation, consider the following:
- Consolidation allows you to make just one monthly payment to one servicer.
- Consolidation extends the loan repayment period and therefore increases the cost of the loan over time.
- You could lose any benefits that accompanied the original loan(s) if you choose to consolidate. If you consolidate while your loan is in a grace period, you will have to begin repayment immediately. The government will no longer subsidize your interest during periods of forbearance on a consolidated Perkins loan, and you will lose any loan-forgiveness opportunities for your Perkins loan.
- If you are in default when you consolidate, collection fees of up to 18.5% can be added to your unpaid balance, and the government can require you to repay your Direct Consolidation loan under the income contingent repayment plan.
- Interest Rate: Consolidation may lower or increase your interest rate depending on your loans’ current rates. For all new consolidations, the interest rate on the consolidation loan will be the weighted average of the interest rates on the loans that are consolidated, rounded to the nearest higher one-eighth of one percent. The consolidation loan interest rate is capped at 8.25 percent. If you have variable rate loans, you can consider consolidating when interest rates are low to lock in the low interest rates. You can learn more about Direct Consolidation Loans at the Office of Federal Student Aid’s website.
- Credit: Consolidation does not clear the default notation on your credit report. You may want to consider rehabilitating your loan before you consolidate, which will clear the default rating from your credit.
- One Time Remedy: In most cases, loans can be consolidated only once. However, you can consolidate an existing Consolidation Loan into a new Consolidation Loan if you include at least one additional, eligible loan in the consolidation.
Default – Private Student Loans
Many private student loans go into default after four months of non-payment (120 days), but the specific terms of default vary by loan contract.
There are no uniform refinancing options for distressed borrowers of private student loans. If you have trouble making payments on your private loan, you need to contact your loan servicer or check with your private loan contract to determine your options.
Loan Forgiveness and Public Service
If you work in public service, you may be able to have part of your federal student loan debt forgiven. Qualifying public-interest jobs include government service, military service, law enforcement, public health, and certain teaching positions.
Public service loan forgiveness is not automatic. You must apply for loan forgiveness once you have made 120 qualifying payments.
To qualify you must:
- Have a Direct Subsidized or Unsubsidized, Direct PLUS, or Direct Consolidation Loan that is not in default.
- Make 120 monthly payments after October 1, 2007.
- Pay under the IBR, ICR, standard (10-year), or other qualifying plan.
- Be employed full-time in a public service job during the period in which you make each of the 120 payments.
Perkins and FFEL loans are not eligible for public service loan forgiveness. However, you can consolidate these loans into a Direct Consolidation Loan to take advantage of public service loan forgiveness. Payments made prior to consolidation do not count toward the 120 qualifying payments.
Tip: Any amount forgiven under the public service loan forgiveness program is NOT taxable as income.
See StudentAid.gov for more details on whether you qualify for public service loan forgiveness.
Statute of Limitations - Federal Student Loans
Federal student loan debt is not subject to a statute of limitations. This means that there is no time limit for attempting to collect a federal student loan by:
- Filing suit
- Enforcing a judgment
- Obtaining an offset or garnishment
But you may be able to cancel your federal student loans in limited circumstances.
Student Loans and Bankruptcy
You may have heard that you cannot discharge your student loans, even in bankruptcy. This is NOT correct. You can discharge your federal and private student loans in bankruptcy if you are able to demonstrate in court that paying your loans would cause you and your dependents “undue hardship.” The court will consider your financial circumstances in determining whether paying your student loans would cause an undue hardship. Filing for bankruptcy is a very personal decision and can have a significant, long-term impact on your finances. If you are thinking seriously about filing, you should consult a lawyer.
To learn more about discharging student loans in bankruptcy, visit StudentAid.gov.
Federal Loan Cancellation
You can cancel your federal student loans in limited circumstances. Cancellation options vary depending on the type of loans you have.
Some common cancellation programs are based on:
- Borrower’s Death
- Permanent and Total Disability
- Closure of school while student was enrolled
For more information on the terms and conditions of available federal student loan cancellation programs, visit Studentaid.gov.