What if I am in Default?

A common mistake student's make, is the difference between having their student loan(s) in a delinquency status or a default status. Below is an attempt to explain this difference.

Delinquency - begins when a borrower fails to make the equivalent of one full payment after the payment is due. You can remain in a delinquency status from 30 days until 240 days. During the delinquency period, the lender/servicer must exercise "due diligence" in attempting to collect the loan; that is, the lender/servicer must make repeated efforts to locate and contact the borrower about repayment. The student may be able to qualify for deferment or forbearance options to correct a delinquency problem. See "What If I Have Difficulty Making Payments?"

A student can avoid default by calling his/her lender or servicer. Baker College students can also reach our Student Loan Advisors at (810) 766-4285 or (810) 766-4213 or toll free at 1-888-690-7912. You can also e-mail them at: loans@baker.edu.

Default - default can occur between 240 and 270 days of no monthly payments on a student loan. Lenders/servicers will "accelerate" a defaulted loan(s), which means that the entire balance of the loan (principal and interest) becomes due in a single payment. The lender/servicer will take steps to place the loan(s) in default and turn the loan(s) over to the state guaranty agency or to the U.S. Department of Education if loan(s) are Direct Loans.

Once the loan is assigned to a guaranty agency or the US Department of Education for collection, the following steps may be taken to recover the outstanding balance due:

The US Department of Treasury may withhold any tax refunds and apply it towards the repayment of the loan(s).

The borrower may have to pay additional collection costs.

The borrower may be subject to Administrative Wage Garnishment, whereby the US Department of Education will require your employer to forward 10% to 15% of your disposable income towards repayment of your loan(s).

The Department may take legal action to force a borrower to repay the loan(s).

Finally, credit bureaus will be notified, and the borrowers credit rating will suffer.

Once a loan is declared in default, the borrower is no longer entitled to any deferments or forbearances. In addition, the borrower may not receive any additional Title IV Federal student aid while loan(s) are in a default status.

All state guaranty agencies and the US Department of Education will accept regular monthly payments that are both reasonable and affordable for the borrower to reduce that amount owed on defaulted loan(s).

Who currently holds the defaulted loan(s)?

This if the first question you must answer in an attempt to correct defaulted loan(s). If a borrower is unsure who holds the loan(s) they can call 1-800-4-FED-AID (1-800-433-3243) for address and phone number of the agency, which holds the defaulted loan(s).
For example:

Federal Family Education Loans (FFEL), which includes Federal Stafford and Federal PLUS loans, when placed in default, are first assigned to a guaranty agency (an organization that administers the FFEL Program for your state) for collection. Periodically, guaranty agencies assign loans to the US Department of Education (ED) for collection.

Direct Loans, which include Federal Direct Stafford, and Federal Direct PLUS loans are managed through the William D. Ford Federal Direct Loan Program. When placed in default, these loans are assigned to the US Department of Education's Debt Collection Service.

Defaulted Loans Held By A Guaranty Agency

For loan(s) held by guaranty agencies, the borrower would need to contact that state agency and will usually speak to the state's collection unit. Check here for a complete list of the guaranty agencies including addresses and phone numbers.

Defaulted Loans Held By the US Department of Education (ED)

To find out more about loan(s) held by the US Department of Education, please call the Customer Service Center at 1-800-621-3115. Additionally, a borrower can contact the Department by e-mail at dcshelp@ncs.com with both general questions about defaulted student loans as well as account-specific inquires.

If ED holds the defaulted student loan(s), a borrower should establish a repayment arrangement with Debt Collection Service or the collection agency currently administering the account on behalf of ED. The borrower can mail a payment to ED either by check or money order to:

National Payment Center
P.O. Box 4169
Greenville, TX 75403-4169

See Guide to Defaulted Student Loans for further information.

What Options are Available?

There are several options available to help students bring their loans back to good standing and out of default. Some of these options are listed below. You can select each option listed for more detailed information.

Pay the Loan in Full
Enter the Rehabilitation Program
Reasonable and Affordable Payments
Enter the Default Consolidation Program

It is up to the borrower to determine which option is best. The decision should be based on the amount you can afford to pay initially, the desired outcome (a clean credit report, returning to school, etc.), and the ability to make regular monthly payments in the future.

Pay the Loan in Full

Under this option a borrower can pay the loan in full to the current holder. If a borrower can exercise this option this will immediately resolve the default.

How to Apply: A borrower should contact the holder of their loan(s) for the current pay-off balance (which may include unpaid interest and collection costs) information and obtain the address of where to send the payment.

Benefits:
The borrowers credit report will show the defaulted loans as paid-in-full.

The borrower will be eligible to receive financial aid as soon as the payment is received and they have a letter from the holder of the loan(s) stating that the balance is paid in full.

Although more costly initially, it is the least expensive option in the long run (lower interest and collection expenses).

Enter the Rehabilitation Program

This program allows a defaulted borrower to make 12 consecutive monthly payments to the holder of the loan(s) to show good faith in wanting to resolve the default. After they have made six (6) consecutive monthly payments, financial aid eligibility may be reinstated. Once the 12 payments have been received and recorded the default will be removed from the borrowers credit report. Note: The borrower must continue to make payments until notified by the holder of the loan(s) it has been rehabilitated. A lending institution will purchase the loan(s) creating a brand new loan. The borrower will then continue making monthly payments to the new lender/servicer. At this point the borrower can regain eligibility rights for deferment and forbearance.

How To Apply: The borrower needs to contact the holder of their loan(s) to discuss a satisfactory monthly payment and complete a rehabilitation agreement contract.


Benefits:
The loan(s) will be repurchased and the negative reporting of the defaulted loan(s) will be deleted from the borrowers credit report.

The borrower may be eligible to receive financial aid after six (6) consecutive monthly payments. The borrower must submit a letter from the holder of their loan(s) to the Financial Aid Office, which states that satisfactory payments have been made and that the borrower is now eligible for financial aid.

The rehabilitated loan(s) will become eligible for any applicable deferments.

To Qualify:
Payments must be consistently remitted within 15 days of the assigned due date for a period of 12-14 months.
Payments must be voluntary and the payment amount must be approved the agency holding the loan(s).
The borrower cannot pay the account ahead or remit double payments.
Payments must be remitted until rehabilitation approval notice is received.
The adverse credit will be deleted within 60 days of repurchase. Please allow an additional 30-60 days for credit bureaus to update their systems.

Reasonable and Affordable Payments

This option allows a borrower to make arrangements with the current holder of their loan(s) to make consecutive monthly payments until the loan(s) is/are paid in full. The loan(s) will remain in a default status until completely paid and then the credit report will indicate the defaulted loan(s) are paid in full.

The difference between this program and the rehabilitation program is the defaulted loan(s) are not cleared until the entire amount owed has been paid in full. This could take years. But under the rehabilitation program the defaulted loan(s) are cleared shortly after the twelve (12) consecutive monthly payments have been received and recorded.

The reasonable and affordable program still allows after six (6) consecutive monthly payments the borrowers financial aid eligibility may be reinstated. But again, if one monthly payment is missed the loan(s) will be returned to a default status and the borrower will lose eligibility for financial aid.

How to Apply: Contact the holder of the loan(s) to determine a monthly payment amount and where to send the payments.

Benefits:
If a borrower is not concerned with their credit report or receiving financial aid, this method requires the least amount of effort.

Any tax refund checks will not be used to offset the defaulted student loan balance.

The borrower may be eligible to receive financial aid after six (6) consecutive monthly payments. They must submit a letter from the holder of the loan(s) to the Financial Aid Office that states satisfactory payments have been made and they are eligible for financial aid.

To Qualify:
A borrower must complete a Monthly Income and Expenditure Statement. The form must be completed, notarized and returned with a copy of the most recent pay stub or a statement from Social Services, and the most recent Federal tax form (1040, 1040A, 1040EZ).

Once this information is received a reasonable and affordable monthly payment will be determined. Please remember that it is in the borrowers best interest to make sure the payment covers the monthly interest and collection costs.

Default Consolidation Program

Under this program the borrower can consolidate the defaulted loan(s) (usually making three (3) consecutive monthly payments) into a new loan. Once the borrower has made the required payments (if necessary) they can request a consolidation application. This process takes 60-90 days. Until the consolidation process is complete, the borrower must continue to make monthly payments or the consolidation will not be approved. The consolidation creates a new loan with new deferment options available. There are two programs available for consolidating defaulted loans.

Benefits:
This option is most beneficial if the borrower may have difficulty making any required monthly payment.

Other than paying the loan in full, this is the quickest way to eliminate the default status.

Credit report will show the defaulted loan as paid in full through consolidation.

How to Apply:
Federal Family Education Loan Program: the borrower, prior to consolidating into this program, must be in repayment on the defaulted loan(s) (that is, three voluntary, on-time, full monthly payments). For more information about this program, contact the holder of the defaulted loans or the Michigan Higher Education Student Loan Authority at 1-888-MHESLA-1 (1-888-643-7521).

Federal Direct Consolidation Loan Program: This program generally requires the borrower to make three (3) consecutive monthly payments with the holder of the defaulted loan(s) prior to processing a consolidation. However, if the borrower selects the Income Contingent Repayment Option (see: Loan Repayment Options), they may not be required to make these payments prior to consolidation. For more information, call the Federal Direct Loan Consolidation Center at 1-800-557-7392.