Resolving Student Loan Defaults
Student Loans and Default
A default of a student loan occurs when a borrower fails to make his or her payments as scheduled, according to the terms of the promissory note, which is the binding legal document that the borrower signed at the time that the loan was taken out. There are different ramifications to a student loan default, depending on whether the loan is a federal loan or a private loan.
A federal student loan becomes delinquent on the first day after you miss a payment. The delinquency will continue until all payments are made to bring the loan current. Loan servicers may report the delinquency to the three credit reporting agencies after a delinquency of 90 days. This can negatively impact your credit score.
A borrower with a delinquent federal student loan has several options to avoid default, such as consolidation, switching repayment plans, deferment or forbearance. Sometimes, though, borrowers cannot avoid default. The rules are complicated and sometimes it is scary to take action. The attorneys at Leiderman Shelomith Alexander + Somodevilla, PLLC (“LSAS Law”) can help you.
A federal student loan is considered in default after you fail to make a payment for 270 days. There is no statute of limitations for a federal student loan, so doing nothing will not cure the default. The consequences of default include:
- The entire unpaid balance of the loan, and any interest, becomes immediately due and payable.
- You lose eligibility for deferment, forbearance, and repayment plans.
- You lose eligibility for additional federal student aid.
- Your loan account is assigned to a collection agency.
- The loan will be reported as delinquent to credit bureaus, damaging your credit rating.
- Your federal and state tax refunds may be withheld through a tax offset. This means that the Internal Revenue Service can take your federal and state tax refund to collect any of your defaulted student loan debt.
- Your student loan debt will increase because of the late fees, additional interest, court costs, collection fees, attorney’s fees, and any other costs associated with the collection process.
- Your employer (at the request of the federal government) can withhold money from your pay and send the money to the government. This process is called administrative wage garnishment.
- The loan holder can take legal action against you, and you may not be able to purchase or sell assets such as real estate.
- Federal employees face the possibility of having 15% of their disposable pay offset by their employer toward repayment of their loan through Federal Salary Offset.
- It will take years to reestablish your credit and recover from default.
The attorneys at LSAS Law can help you get out of default. The three main ways to get out of a federal student loan default are:
- Loan consolidation. In many situations, you can cure your default by consolidating your federal student loans, if eligible, and by agreeing to immediately begin an extended repayment plan, which will allow you to cure the default.
- Loan rehabilitation. To rehabilitate your default, you generally must make nine payments within a ten month period, allowing you to cure your default. In some situations, such as an administrative wage garnishment, this is the only way to get out of a student loan default. Rehabilitation also allows the default notation to be removed from your credit report.
- Loan settlement. Another option to get out of default is through a loan settlement. Usually, a lump sum payment is required and the federal government has strict guidelines on the amounts of the settlements that can be achieved.
The attorneys at LSAS Law have experience dealing with each of these methods of curing a federal student loan default.
More problematic is a private student loan default. A private student loan default is governed solely by the promissory note and related documents entered into between the borrower and the lender. The federal government programs described above are not available for borrowers of private student loans.
However, private student loans do have a statute of limitations, meaning that after a period of time, and under certain circumstances, the loans can expire. Furthermore, there are a myriad of defenses that are generally not available to borrowers of federal student loans. Finally, the remedies that student loan lenders have against private student loan borrowers are generally less strict than federal student loan lenders, and varies on a state by state basis.
The attorneys at LSAS Law understand that every situation is different, making the need for an experienced student loan law attorney even more valuable.