Defaulted Federal Student Loans
Like any other loan types, federal student loans have the borrower sign a promissory note before the disbursement of the loan. In the promissory note, all the details of the loan including the amount loaned, interest rate, payment due dates and remedies if the loans are not paid off according to the schedule are laid out clearly. If for some reason the borrower stops to make the promised payments the lender will then put his loans into a Defaulted Loan status if the payment was not made for 270 days after the payment due date. The defaulted status will then adversely affect the borrower’s credit report and make it difficult for them to take out any further loans.
Difference between Delinquent and Defaulted Loan
A delinquent loan can be a loan that just has one late payment even a payment for being late one day. This does not mean that you are in default as yet. Being delinquent means that the borrower might have some extra penalty fees and if that payment has not been made the borrower can be reported to a collection agency after 90 days of being delinquent.
A defaulted loan, however, will first affect your credit report negatively and will make it very hard for you to borrow money again in the future. The default status of your loans will put as a note on your account. Even when you have paid off these loans your credit report will still reflect your once default status for years. It can inform new lenders how you were once in default.
Effects of a Defaulted Loan
Ineligibility for New Federal Aid
You become ineligible for any new federal student aid if you are in default. This can present a difficult scenario for those who are enrolled in a program and will be needing further assistance in the completion of the degree or program. So now the borrower is stuck with a lot of debt and not a better job that can help to pay off that loan due to incompletion of the program.
Ineligible for Deferments and Forbearances
Defaulted loans become ineligible for deferments and forbearances. This puts the borrower in a very tight spot as the only option that the borrower has is to make a payment even if the borrower is in a financial difficulty. Taking advantage of the deferments and forbearances is like an advantage the borrower receives so he can get a break on his payments for a certain time period if the situation arises. Many borrowers do not apply for these beneficial programs until they start receiving collection calls. At that point, their loans have already become ineligible for deferments.
Wage garnishment is an order that requires your employer to deduct a certain amount from your paycheck. It can be as high as 15% of your paycheck. When your loan falls into default status department OF Education has the right to start garnishing your wages till the remaining loan balance is off.Once the wage garnishment is put into action your options to become very selective. Consolidation to get out of default is no longer an option. The lender will not stop garnishing your wages till you enrol into a rehabilitation program and make sufficient payments to bring your loan current.
Treasury Offset Program
Along with your wage garnishment, the Department of Education can also send your case to the IRS to offset any tax refund that you may be receiving and have it applied to your federal student loan balance. This implies that any refund that you were going to get from the IRS goes directly to your loan payoff.
Bringing the Loans Out of Default
Consolidation is one way to get out of default under the William D. Ford Direct Loan program. Under this program, all your loans are paid off and are consolidated into one single new loan which can be with a new loan servicer. There will be one single loan with one new payment and one weighted average interest rate.Consolidation also allows you to sign up for different repayment plans which can offer you payments starting as low as $0.00. This zero dollar payment does actually count as a payment and counts towards the term of your forgiveness program. There are pros and cons of consolidation which should be fully understood by the borrower.
To get back into good standing the borrower will need to show the Department of Education that they are willing to commit and bring their loans current. To do so the borrower can enrol in a rehabilitation program. Under this program, the borrower makes the agreed upon payments to the lender for 9 months. The payments are calculated based on income, family size and expenses. Like any other program, there are pros and cons to this program also which should be completely understood before signing up.