Managing Student Loans: Surviving a Student Loan Default

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In this series, we’ve talked about management strategies for making your student loans - especially federally backed FFEL loans and federally issued Direct Loans. But what happens if you have not taken advantage of any of those programs, or you’ve run out of deferment time or can’t qualify for a forbearance? If you don’t make a payment for 269 days, you move from a "mere" delinquency into a full blown default status on Day 270.

This is a serious breach of your agreement with the lender and your options are reduced as a result.

Here’s what can happen if you default:

  • The entire balance of your loan will become immediately due and payable.
  • The servicer or owner of the loan may return the loan to the Department of Education, which will hire a collection agency to dun you for the money.
  • The collection agency is allowed to tack onto your balance a fee up to 25% of the balance.
  • The servicer or the collector may still call and write nasty letters, but they can also take more drastic action like:
  1. Having your paycheck garnished.
  2. Sue you and add the cost to your loan balance.
  3. Intercept your tax refund.
  4. Deny you more student loans.
  5. Report your default to credit bureaus.

Finding Your Loan Servicer

On the positive side, it is possible to bring your loans current, but how depends on the type of loans you have.

If you have defaulted on a Perkins Loan, you must contact the school that issued the loan to discuss your repayment options.

For FFEL loans and Direct loans, your first stop will probably be your last servicer. If you are unsure of which company is servicing your loans, you can check your status through the National Student Loan Data System at or call the Loan Locator Department of the Department of Education at 1-800-433-3243.

To access your information, you will need to know your Social Security Number and your Personal Identification Number (PIN). If you have not obtained a PIN or don’t remember what it is, you can remedy that at the PIN web site,

The Rehabilitation Process

At default, the entire balance is due, not just the monthly payments you didn’t pay. It may be difficult, if not impossible, to pay the loan off completely, and many borrowers would not even be able to make up the nine months of delinquent payments.  Therefore, many borrowers opt for loan rehabilitation.

To rehab a defaulted student loan, you and the collection agency negotiate a “reasonable and affordable payment plan. Once you show that you are willing and able to make those payments, the Department of Education will shop your loan around to servicers to find one that will take you on again. The collection costs are reduced to a maximum of 16%, but those are tacked onto your outstanding loan balance.

Negotiating Your Rehabilitation

The collection agency will probably offer you a rehabilitation period of ten months. You must make nine of those ten payments.

You may rehabilitate your loans only once, so make it count.

You will have to provide the collector with proof of your yearly income.

This will probably be a tax return, but you could also provide other forms of proof acceptable to the collector.

The collector will probably offer you a payment that represents 15% of your disposable income. This is a standard amount that arises from the formula used in the Income Based Repayment program for older student loans. You are not required to accept this payment offer. You can negotiate a different amount. But, keep in mind that the collector’s profit depends in part on what they’re able to get you to agree to pay. They will be motivated to set your payments as high as possible and may resist any attempts at reducing the payment. So you must be prepared with a reasonable justification for reducing the payment. Do you have lots of medical bills? Are you paying tuition for a child who requires special schooling for a learning or medical issue?

Do you have unusual expenses related to your job or business that are not reimbursed?

If you choose to negotiate a lower payment with the collector, there is a high likelihood that your payment will increase after your rehabilitation period even if you apply for an Income Dependent Payment plan.

Make sure you agree to nothing until you see it in writing and it conforms to your understanding of the agreement you negotiated. For more information on dealing with student loan collectors, see our article: MANAGING STUDENT LOANS: DEALING WITH COLLECTORS.

When Your Loans are Rehabilitated

When you have completed your rehab successfully, you become eligible again for federal benefits and for loan programs like forbearance, deferment, loan forgiveness and for additional student loans. Your monthly payments may increase after the initial rehabilitation period, but successful rehabilitation also means that you can consolidate your loans (if they are eligible) or apply for Income Dependent Repayment.

For lots more information on managing your student loans during difficult financial times, see our articles on the following issues:

General Issues

What Kind of Loans Do You Have?

Your Options for Managing Student Loans in a Nutshell

Glossary of Helpful Student Loan Terms

When You Can't Make Your Payments

Delinquency and Default

Deferment and Forbearance

Repayment Strategies During Tough Times

Surviving a Student Loan Default

Dealing with Student Loan Collectors

Managing Private Loans

Loan Forgiveness

Loan Forgiveness for School Status

Loan Forgiveness for Disability or Death

Public Service Loan Forgiveness

Student Loans in Bankruptcy

Bankruptcy Discharge

Discharging Private Loans

Using Chapter 13 Repayment Plans