DEFAULT - Borrower Defaults
"DEFAULT - Borrower Defaults" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 9th January 2012
A failure to meet the terms of the agreement to repay a loan, especially making regular payments towards the repayment of the loan. Missing a certain number of payments on your loan, either by not making payments as scheduled, or not making arrangements to postpone the payments. When a borrower defaults, the loan costs them more in the long run and has a negative effect on their credit report. Default has disastrous effects on credit; avoid it.
Failure to repay your loan(s) according to the terms agreed upon when you signed your promissory note. Default may also result from failure to submit requests for deferment or cancellation on time. The consequences of default are severe. Your loan is considered in default at 270 days past due. If you default on your loan, your school, the lender, or guaranty agency that holds your loan, the state, and the federal government may take all action necessary to recover the money. The consequences of defaulting on your student loan are serious.
Actions may include:
- Notifying national credit bureaus of your default which may affect your credit rating for a long time (for example, you may find it difficult to borrow money for a car or house). As a poor credit risk, you will find it increasingly difficult to obtain loans of any kind.
- The agency holding your loan may request that your employer deduct payments from your paycheck;
- You may be liable for any charges associated with collecting the loan;
- If you decide to return to school, you will not be entitled to receive any more federal student aid;
- Collection costs of up to 25% of your balance are added to your debt.
- You become ineligible for further financial aid until your loan is paid in full or you have entered a qualifying repayment agreement with EdFund
- The U.S. Department of Education may request that the Internal Revenue Service withhold any income tax refunds that you may be eligible for to apply towards the amount you owe.
- You lose the right to deferment or to request a forbearance.
- Your school may withhold academic transcripts.
- Your tax refunds may be withheld to repay the defaulted student loan.
- Federal payments to you, including Social Security retirement and/or disability income, may be reduced.
- Your wages may be garnished.
If you’re a federal student loan recipient, there are two key points to remember. First, the interest rate you pay is lower than commercial rates because the federal government subsidizes the loan. Second, if you are a student borrower, you don’t have to begin to repay your Perkins or Stafford Loans until you leave school or drop below half-time. As generous as these terms are, you shouldn’t forget that you do have to repay your loan. Failure to do so could result in your loan(s) being declared delinquent or in default. This could have a negative impact on your financial status and creditworthiness in the future. In addition, the Internal Revenue Service can withhold your U.S. individual income tax refund and apply it to the amount you owe, or the agency holding your loan might ask your employer to deduct payments from your paycheck. Also, you may be liable for loan collection expenses.
Your lender will send you information about repayment, and you’ll be notified of the date repayment begins. However, you’re responsible for beginning repayment on time even if you don’t receive this information. Failing to make payments on your loan can lead to default. Default occurs when you fail to meet the terms and conditions of the promissory note, such as not making timely payments on the loan. Under certain circumstances, you can receive periods of deferment or forbearance that allow you to postpone loan repayment. ese periods don’t count toward the length of time you have to repay your loan. You can’t get a deferment or forbearance for a loan that is already in default. You MUST continue making payments on your student loan until you have been notified that your request for deferment has been granted. If you don’t, and your deferment is not approved, you will become delinquent and may default on your loan.
In the new environment of government accountability of recent years, many more incentives exist to prevent defaults. There is the cost of roughly $30 million over the last 10 years to taxpayers. And there is an even higher cost for the students themselves. A student who defaults faces ruined credit, garnished wages, tax offsets, lawsuits, as well as annoying phone calls, embarrassment and humiliation. Borrowers who default are now liable for, aside from the entire principal and interest due in full, the full cost of collecting this amount, calculated at roughly 18 percent of the total.
Default represents one side of the failure of loans. But consider another side. Because loans involve risk, people often miscalculate the risk the other way as well. They don’t understand the lifetime of rewards to a bachelor’s degree and see only the first few years, when college expenses are high and incomes are small or nonexistent. They decide not to attend college, or to go to a cheaper college, which may not be right for them, or they work too many hours to avoid loans and jeopardize their academic success. They underinvest in themselves. That is a significant but unmeasured cost of offering debt-financed college education. The PLUS applicant and the student must not be in default on a federal student loan.
If you don’t repay your student loan on time or according to the terms in your promissory note, you could default on this legal obligation, which has serious consequences and will adversely affect your credit rating. Even if you apply for a deferment or forbearance, you must continue to make payments until you have been notified that your request has been approved. If you don’t, you might end up in default. Once a loan is declared in default, you are no longer entitled to any deferments or forbearances. In addition, you may not receive any additional Title IV federal student aid if you are in default on any Title IV student loan until you have made payments of an approved amount for at least six consecutive months.
If you’re in default on a federal student loan, you still might be able to consolidate if you make satisfactory repayment arrangements on the defaulted loan or agree to repay the consolidation loan under the Income-Contingent, Income- Sensitive, or Income-Based Repayment Plans, provided the defaulted loan is not subject to a judgment or wage garnishment. if you are employed in certain public service jobs and have made 120 payments on your Direct Loans (after Oct. 1, 2007), the remaining balance that you owe may be forgiven. Visit: U.S. Department of Education Defaulted Student Loans Section
School’s loan default rate
The school’s loan default rate (the percentage of students who attended the school, took out federal student loans and failed to repay their loans on time). You might not be able to get aid from some of our programs at a school that has a high default rate. Stafford Loans origination or federal default fees of up to 1 percent may be deducted from each loan disbursement and Federal PLUS Loans for Parents and Graduate Students (Grad PLUS) origination or federal default fees of up to 4 percent may be deducted from each loan disbursement.
When you return to school, you’re not entitled to receive additional federal student financial aid. Legal action also might be taken against you. In many cases, default can be avoided by submitting a request for a deferment, forbearance, discharge or cancellation and by providing the required documentation. Only payments made under certain repayment plans may be counted toward the required 120 payments. You must not be in default on the loans that are forgiven. For more information, go to http://www.studentaid.ed.gov/students/attachments/ siteresources/LoanForgivenessv4.pdf.
EdFund offers students a wide range of financial aid and debt management information while supporting schools with advanced loan processing solutions and default prevention techniques. Operating as an auxiliary corporation of the California Student Aid Commission, EdFund processes more than $7.8 billion in student loans annually (including consolidation loans) and manages a portfolio of outstanding loans valued at $26 billion. EdFund is headquartered in Rancho Cordova, California with regional offices located throughout the nation.