Defaulted Student Loan

By: EconomyWatch Content   Date: 25 November 2009

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A defaulted student loan has serious consequences and so all efforts should be made to avoid a default. In case one has already defaulted, several options are available to get out of this predicament. A student is responsible for repaying his loan even if they do not graduate or are unable to find a job after graduation. A default occurs when a student does not make the payments towards Federal student loans for 270-360 days. The absence of special arrangements for the deferment or forbearance of a student loan may also lead to default. 

Consequences of a Defaulted Student Loan

A defaulted student loan can have serious consequences. Listed below are some of them:

  • The loans can be turned over to a collection agency.

  • One can be sued for the entire amount of the loan and not only the unpaid amount.

  • One becomes liable for all the costs associated with the collection of the loan.

  • One’s wages can be garnished.

  • Federal and state income tax refunds may be intercepted.

  • A part of one’s social security benefit payments may be withheld.

  • Can have a negative impact on one’s credit record.

  • No more federal financial aid will be available.

  • No chances of deferments.

  • Professional licenses may not be renewed.

  • Enlistment in Armed Forces may be prohibited.

Rectifying Defaulted Student Loan

Repayment of the loan is a must for getting out of default. A defaulted student loan can also be rehabilitated if the borrower makes six consecutive, voluntary, on-time payments and these do not include the amounts offset from garnishments or any other benefits. This is also done if the borrower makes nine of the ten consecutive payments within 20 days of the due date and applies and receives rehabilitation.

The monthly payment amount for rehabilitation of a defaulted student loan is determined by the guarantee agency after considering the borrower’s financial circumstances and his disposable income. A delinquent loan can also be rectified by consolidating it before the lender files for a default claim. The consolidation loan is a new one and wipes out all the delinquent loans. Several companies offer specialized services to convert a defaulted student loan into current and reduce the overall debt amount.


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