In order to receive any federal student loans or funding, borrowers must sign a promissory note prior to the disbursement of funds which is a legally binding agreement between the borrower and the lender or the federal government. In this promissory note, there would have been clear repayment terms for the money that were being borrowed. Typically, a promissory note will discuss payment due dates, interest rates, and remedies if the loans are not paid off as scheduled. If the borrower stops making payments as agreed upon in the promissory note, the lender will be placed into a default status on the loans after 270 days of non-payment. This default status will be displayed on your credit report and will make it difficult to take out any loans in the future.

What is Delinquency?

A delinquency on your student loans happens as soon as you miss one payment, or are even late on a payment by one day. It essentially means that the borrower is late on a payment, but has not fallen into default on their loans yet. In many cases, there can be consequences to being delinquent, which may include various fees, and having it noted on your account with collections agencies if the delinquency has lasted at least 90 days.

Dangers and Penalties of Falling Into Default

Falling into default on your Federal Student Loans can be a serious issue for a multitude of reasons. Firstly, it will negatively impact your credit, which will make trying to borrow money very difficult in the future. You will have a note on your credit report that your loans are in default. Since federal student loans are guaranteed by the federal government they cannot go away with time or be discharged through bankruptcy. Therefore, federal and state guarantee agencies and their collection agencies have a tremendous amount of leverage in the collection process.

DEFAULT PENALTIES MAY INCLUDE:

• Wage garnishment (15%-25% of your paycheck)

• Tax offsets and/or IRS tax liens

• Harassing calls from creditors

• Threatening letters from collection agencies

• While in default you are ineligible for deferments and forbearance

• Negative impact on credit score

• Suspension or non-renewal of professional licenses

• Litigation and judgment cost

• Denied access to your diploma & transcripts

• Ineligible for federal financial aid

• Lose of income tax refund

• Heavy penalties and high collection charges

Debt Collections

Falling into default on your federal student loans will also cause your loans to be assigned and/or sold to an in-house or 3rd party collection agency. Once this happens, you will be inundated with harassing and sometimes disparaging phone calls from the debt collector attempting to collect payments. Along with the harassing, phone calls will come additional collection fees added to your loan balance. The collection agencies are allowed to charge "reasonable" fees as a commission for their services. This can cause a lot of confusion for the borrower who, if paying the collection agency, can be misled to wrongly believe they are paying off their loans but may only be paying the fees without their student loan balance being paid down. In fact, it’s not uncommon for loan balances to increase while a borrower is paying a collection agency. If the accumulating interest on the loan and the collection fees combined are larger than the monthly amount being paid to collections, the loan balance will increase and borrowers can literally pay forever on their defaulted loans without the proper guidance and assistance.

Federal Student Loan Borrowing Limitations

While in default on your student loans you lose all eligibility for new financial aid. This can present a very large problem for borrowers who have taken out loans to obtain a degree, and are unable to obtain this degree due to federal aid borrowing limitations. The borrower is then stuck with the student loan debt but without the ability to finish obtaining the degree and a better-paying job until the previous loans are brought back to current standing through appropriate programs.

Lost Eligibility For Deferments And Forbearance

Default loans lose eligibility for deferments and forbearance. Again, this presents a very dangerous predicament for the borrower who is typically only faced with the option of paying back their loans during this financial difficulty. Deferments and forbearances are designed to allow people some breathing room on their loans while they are having these financial difficulties. The reality is that many borrowers are not applying for these benefits programs while they are eligible, but rather once the collection calls have started and the eligibility for deferments are no longer available.

Wage Garnishment

One of the most frustrating issues when falling into default on your Federal Student Loans is that the Department of Education can impose a wage garnishment order placed on you until the loans are paid off. A wage garnishment is a deduction directly from your paycheck that your employer must withhold from you. A garnishment order can be as high as 15-25% of your paycheck. Once an active wage garnishment order has been put on your account, your options become very limited. You can no longer consolidate to get out of default, and your lender will not lift the garnishment unless you enter into a rehabilitation program and make satisfactory payments to get your loan back in good standing.

Tax Offset

Coinciding with the wage garnishment, the Department of Education can and will refer your account to the IRS to offset and withhold any tax refund the defaulted borrower may be entitled to. This means that any money you would normally have come back to you in the form of a tax refund would instead by sent from the IRS directly to your student loan servicer to pay off the fees, interest and principal of the federal student loan debt. In addition, and equally as important, the IRS will be instructed to and will apply your spouse’s tax refund to your loans if you are married and filing jointly - even if your spouse does not have student loans, and is not a co-signor on the loans.

STEPS TO GETTING OUT OF DEFAULT

Step One: Rehabilitation

Getting your loans out of default will require the borrower to be proactive and take action to get back into good standing. One option that’s available is a rehabilitation program. A rehabilitation of the loan is usually a 6-9 month program where the borrower makes agreed upon payments with the lender or 3rd party collection entity, and after all agreed payments are made on time, the default status is removed from the loan. The payment in the rehabilitation program will be calculated identically to the Income-Based Repayment (IBR) program payment. If the borrower fails to make one payment, the rehabilitation would need to be restarted from the beginning. It is imperative that borrowers adhere to the payment guidelines set forth in order to achieve the re-aging results and maximum benefits.

Step Two: Consolidation

Another option is to consolidate your loan(s) into a qualifying consolidation program under the William D. For Direct loan program. In this program, qualifying federal loans are all paid off and consolidated into one new loan, often times with a new servicing institution. You would have one brand new loan that’s in good standing, with an interest rate at or slightly below the weighted average interest rate of your old loans. When consolidating, you are also able to choose from a selection of repayment plan options, some which can offer payments as low as $0.00 per month. This payment actually counts as a payment, unlike a deferment or forbearance which simply pauses the loan. Often people can have $0.00 monthly payments for years, and any unpaid balance remaining on the loan is forgiven after 20-25 years.

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