College and University Blog

You are responsible for repaying your student loans even if you do not graduate, have trouble finding a job after graduation, or are not happy with your education or school. If you do not make any payments on your student loans for 270 days and do not make arrangements for a deferment or forbearance, your loans will be in default. Defaulting on your student loans has serious consequences.

If you default on your student loan:

• Your loans may be turned over to a collection agency.
• You’ll be liable for collection costs, including court costs and attorney fees.
• You can be sued for the entire amount of your loan.
• Your wages may be garnished. (Federal law limits the amount that may be garnished to 15%)
• Your federal and state income tax refunds may be taken as repayment
• The federal government may withhold part of your Social Security benefit payments
• Your defaulted loans will appear on your credit record. This can make it difficult for you to obtain an auto loan, mortgage, or even credit cards. A bad credit record may also harm your chances of finding a job.
• You won’t receive any more federal financial aid until you repay the loan in full or make arrangements to repay what you already owe. You must make at least six consecutive, on-time, monthly payments. You will also be ineligible for assistance under most federal benefit programs.
• You’ll be ineligible for deferments.
• Federal interest benefits will be denied.
• You may be unable to renew a professional license you hold.

Two options available for postponing repayment of your student loans are deferments and forbearances. If there is a possibility that you may default on your loan, ask your lender whether you are eligible for a deferment or forbearance before you default. You cannot receive a deferment or forbearance once your loan is in default status.

During deferment, the lender allows you to postpone repaying the principal of your loan for a specific period of time. Most federal loan programs allow students to defer their loans while they are in school at least half time. For Perkins Loans and Subsidized Stafford Loans, no interest accrues during the deferment period. The federal government pays the interest. For other loan programs, such as the unsubsidized Stafford loan, the interest still accrues during the deferment period. There are limits on the length of a deferment. Deferments are not granted automatically. You must submit an application and provide documentation to support your request for a deferment. Do not stop making payments on your student loans until after you are notified that your deferment has been granted. Deferments are commonly granted for students who are enrolled in undergraduate or graduate school, disabled students who are participating in a rehabilitation training program, unemployment, and economic hardship.

During forbearance, the lender allows you to postpone or reduce your payments, but the interest charges continue to accrue. The federal government does not pay the interest charges on the loan during the forbearance period. There are limits on the length of forbearance. Forbearances are typically granted in 12-month intervals for up to three years. Forbearances are not granted automatically. You must submit an application and provide documentation to support your request for a deferment. Forbearances are granted at the lender’s discretion, usually in cases of extreme financial hardship or other unusual circumstances when the borrower does not qualify for a deferment. Do not stop making payments on your student loans until after you are notified that your forbearance has been granted.

To get out of default, you need to make arrangements with your lender to repay the loan. Once you have made six consecutive full voluntary (excludes payments made by garnishment) on-time (within 15 days of the due date) payments, you will be eligible for additional Title IV aid. After you have made 9 of 10 consecutive payments and applied for and received “rehabilitation”, you will no longer be considered in default. At this time record of the default will be removed from your credit report.

If the default is very recent, the lender may not yet have reported the default to a guarantee agency. Lenders do not need to file a default claim until 90 days after the default occurs. If the borrower brings the delinquency under 270 days (the definition of default) within the 90-day period, before the lender has filed a default claim, they can cure the default. It may also be possible to cure the default by consolidating the delinquent loan before the lender has filed for a default claim. Since the consolidation loan is a new loan and it pays off the delinquent loans, it effectively wipes the slate clean.

The US Department of Education uses the cohort default rate. The most recent cohort data available (2005) indicates a default rate of 4.6%. The cohort default rate is the percentage of federal education loan borrowers who enter repayment in one federal fiscal year and default before the end of the next fiscal year. This short-term measure is used to determine a college’s eligibility to participate in federal student aid programs. If a college has at least 30 borrowers entering repayment and its cohort default rate is more than 40% in a single year or more than 25% for three years in a row, it loses eligibility. The cohort default rate is also used to determine whether a college is eligible for an exception to certain rules. Requirements for a 30-day delay for first time borrowers and multiple disbursements are waived for colleges with cohort default rates less than 10%.

The cohort default rate is a very weak and misleading measure of defaults. A default does not occur until a payment is more than 270 days late, lenders have 90 days to file a claim on a default, and Stafford loans do not enter repayment until the end of a 6 month grace period. The cohort default rate is basically a measure of the percentage of borrowers who never begin making payments on their loans or stop making payments within the first year of graduation.

Data from the National Center for Education Statistics (NCES) indicates a different scenario than what is reported by the U.S. Department of Education. They found that the percentage of students who failed to repay government student loans within the first two years of repayment is 4.5%. The default rate based on a 10-year follow up study is actually 9.7%. Defaults are most likely to occur four years following graduation. With each default, collections costs of up to 40% of the loan balance are added to the loan. This makes repayment more daunting.

There are two key factors in the increase in the national student loan default rate. First, the cost of higher education has been increasing. Tuition at 4-year public colleges rose 56.5% during the last five years. Add this to stagnant federal grant aid and you create an explosion in student debt. Students now borrow 108% more than they did a decade ago. Two-thirds of four-year students graduate with student loan debt totaling almost $20,000. Second, in the past student loan default rates have gone down because of low interest rates. Fixed consolidation loan interest rates bottomed out at 3.4% in the year covering July 2004 to July 2005. Cohort default rates bottomed out for the corresponding reporting period. When the interest rates began to rise, so did the default rates. A higher student loan default rate means higher costs to taxpayers, since the government guarantees student loans against default.

NCES data shows high student loan default rates for Black and Hispanic students, students who leave college with a heavy debt burden, and college graduates who take low-paying jobs. Black graduates had an overall default rate that was more than five times that of White graduates and nine times that of Asians. Hispanic graduates’ overall default rate was more than twice that of Whites and four times that of Asians. The defaults could not be explained by high debt and low salaries. Students with $15,000 in loans were nearly three times more likely to default on their loans than a student with $5,000 in loans. In fact, one in five students with over $15,000 in debt defaulted on his or her loan in the 10 years after graduation. Graduates with the lowest salaries were four times more likely to default than those with the highest salaries.

Posted on 21 Dec