If a borrower defaults, it means s/he has failed to make payments on the student loan according to the terms of the promissory note. (The promissory note is the binding legal document signed by the borrower at the time the loan was taken.) In other words, the borrower failed to make loan payments as scheduled. The school, the financial institution that owns the loan, the loan guarantor, and the federal government all can take action to recover the money owed. Here are some consequences of default:
The borrower would be ineligible for additional federal student aid (FSA) and Title IV funds if s/he decided to return to school.
National credit bureaus can be notified of the default, harming credit rating and making it difficult to buy a car or a house.
Loan payments may be deducted from the borrower's paycheck.
State and federal income tax refunds may be withheld and applied toward the amount owed.
The borrower will have to pay late fees and collection costs on top of what is already owed.
The borrower can be sued.
It is easy for the borrower to restore eligibility to receive additional federal financial student aid (FSA funds).
Repay or satisfy the loan in full. If the student and the loan holder agree on a compromised amount the loan is considered paid in full when the borrower pays the agreed amount. If the loan holder simply writes off the loan, the loan is not paid in full, and the student remains ineligible for FSA funds.
Make six agreed-upon monthly payments over a six month period. The repayment arrangements must be made between the borrower and the loan holder. After the student makes six consecutive, full, voluntary payments on time, s/he regains eligibility for FSA funds. Every qualifying payment must be timely (received before the due date), and you cannot make all six payments as a single lump sum payment. Once your eligibility to receive additional federal financial aid has been restored, you must continue to make timely monthly payments to maintain your eligibility or else it will be permanently lost until the debt is resolved entirely. In other words, you may qualify for this program only once.
Consolidate your federal education loan(s) through the FFEL loan consolidation program or the William D. Ford Direct Loan Program. Contact your Stafford Loan lender for a FFEL Consolidation Loan. Don't know your lender or how to contact them? Contact the National Student Loan Data System (NSLDS) by calling 1-800-999-8219 or visit their website at www.nslds.ed.gov for contact information. For a Direct Consolidation Loan, contact the Loan Origination Center's Consolidation Department at 1-800-557-7392. TTY users may call 1-800-557-7395. Or, you can go to www.loanconsolidation.ed.gov to get more information.
Rehabilitate your loan through your lender's loan rehabilitation program. Although a student can regain eligibility for all FSA funds by making satisfactory repayment arrangements, the loan is still in default. After the student makes more payments, the loan may be rehabilitated (that is, it won't be in default any more), and the student has all the normal loan benefits such as deferments, cancellations, etc. The credit history will also be restored as if this is a new loan. A loan will not be rehabilitated until the borrower makes 12 consecutive, full, voluntary payments on time.
Since defaulted student loans have no statute of limitations for enforceability, you would remain ineligible for additional federal financial aid until you complete one of the options mentioned above.
If you're claiming that your loan was not in default and, therefore, should not have been assigned to a guaranty agency or the Department, you must provide us with evidence that your loan should not be in default status. In most cases, the loan was declared in default by some organization other than the guaranty agency or the Department. For NDSL/Perkins Loans, you must contact the school. For FFEL loans, the guaranty agency that paid the insurance claim on the loan determined that the loan was in default; therefore you must contact the agency and demonstrate that the loan was not properly placed in default.
If the organization which declared the loan in default is now closed, you must provide specific evidence that you took timely and appropriate actions, such as notification of the lender, submitting appropriate forms for deferment, and that the organization defaulted the loan in error.
Once you have completed one of the steps above to regain eligibility to borrow new FSA funds, you must provide a letter to Carnegie Mellon. This letter should come from your lender or guaranty agency documenting that the loan default has been resolved. You should also ask the lender or guaranty agency to update the loan status on NSLDS.
If you have any questions about this information, please contact one of our Assistant Directors in the HUB by calling 412-268-8084, faxing to 412-268-8186 or sending email.
Updated 7-21-04