Can You Default on Student Loans?

Seems like a straight forward question, right? After all, with the unpredictable economy and the different turns that life takes unexpectedly, a default here and there is pretty much normal. Well, the simple answer is that you can default on student loans if you do not make the required payments in a timely manner.

The process for qualifying and receiving financial aid for educational expenses is an easy on line process, but when the notes are due and payable you may find that you will have trouble repaying. Within a short time of graduation from school, or if you drop out of school, you will receive notice that you must begin the repayment process.

If you suffered medical issues, if you cannot find a high paying job, or you have other issues that prevent you from making the payments you will find that postponing the payments have consequences. If you default, it means that you have not made an effort to make payments on the note in a specified amount of time. Let’s begin the discussion with the definition of ‘default’ that is found in the dictionary.

The dictionary defines default as ‘failure to do something required by duty or law’, or ‘failure to pay debts’. If you miss one payment you can default on student loans that are due. You will receive phone calls and letters that demand payment on the account(s). When you have not made payments, nor have you made arrangements to pay on the note and you are 270 days behind, your lender can place your note in default.

If you are not making payments frequently then the lender can place the note in default after 330 days. When the note is in this status then it will become the responsibility of an agency that is called ‘loan guarantee agency’ to collect the debt. This agency will be familiar with the collection guidelines of the state in which you live.

If you have reason to believe that you can default on student loans then you need to speak with the lender. The U.S. Department of Education, Federal Student Aid Division, says that you should immediately contact the lender when you cannot pay. Tell the agent why you cannot pay and ask for options that are available to you.

You may be able to consolidate the note with another or you may be able to make payment arrangements that differ from the original schedule. Rehabilitation is the term given to a payment plan that allows you nine months to make up the total missed payment amount. Rehabilitation will take your loan out of default. It may be that you qualify for forbearance or deferment.

These are terms used to describe a specified amount of time that you will not be required to make payments. Once that time has passed, you will have to resume your payment schedule. You may qualify for one of the repayment plans that are based on the amount of income you make. As your income increases you will be required to make a higher payment.

You need to make application for one of the above plans prior to going into the nonpayment status. You may find that it is difficult to get approved if you are not current on your note. There are two stages of default. The first stage is the missed payment and the time frame before 270 days have passed that you can negotiate for one of the options listed above. The federal loan program allows for the above options but they must be applied for and approved prior to being in a no-pay status.

If you default on any of the federal loans you will not qualify for any other Title IV student grants, loans, or work study programs. After you have made payments for a period of six months you can become eligible for federal aid again.

The second state of the default process is when the loan has been turned over to a collection agency after day 330. This is not a status that you want to find yourself in. The collection agency has the authority to seize your refund money from local, state, and federal income tax returns. They have the authority to seize your assets.

They can garnish up to 15% of your disposable income from earnings. They can also turn the account over to a private collection agency and all these can have a negative impact on your credit report. You can default on student loans but you may find the cost of the consequences is one that you are not willing to pay.