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Defaulted Federal Student Loans

A federal student loan is considered to be in default status when the loan remains delinquent for at least 270 days. If you default on a federal loan, the lender/servicer submits a claim to the guarantor of the loan. The guarantor will pay the lender and then begin collection proceedings. The guarantor will charge additional collection costs causing the amount you originally owed on the loan to increase. 


There are serious consequences to defaulting on a federal student loan.

  • Your college records may be placed on hold and you will lose your student loan deferment options.
  • Your eligibility for additional federal student aid will be terminated and your credit rating will be damaged for several years because defaulted loans are reported to national credit bureaus. You’ll have difficulty qualifying for a new job, credit cards, a car loan, a mortgage, or renting an apartment. You may also be denied a professional license or get hired by an employer that performs credit checks.
  • Your federal and state income tax refunds can be withheld and applied to student loan debt. This is called a tax offset.
  • Up to 15% of your wages can be garnished (withheld). This also means that your employer must be contacted to deduct the monies from your wages.
  • If you win the lottery, the winnings will be used to offset the debt.

Once your federal student loan has defaulted, the Guaranty agency will contact you and work with you to develop a satisfactory repayment plan. Bill statements will be sent and it is important that you take steps to begin repaying your loans. By voluntarily making regular payments, you may be able to resolve a defaulted federal student loan


Loan Rehabilitation

Borrowers who make nine, consecutive, voluntary, regular payments within a ten month period are eligible to have their defaulted student loans rehabilitated, which means the defaulted loan is sold to an eligible lender, the default credit entry on their credit report is removed, the loan is reinstated and the borrower becomes eligible for additional Title IV aid, deferments and forbearances. Collection costs are capped at 16% at the time the defaulted student loans are sold.


To apply for loan rehabilitation you must either call or write to us and request rehabilitation.


Reinstatement of Title IV Eligibility

Borrowers who make six consecutive, monthly, voluntary, regular payments are eligible to have their Title IV student eligibility reinstated. This allows students to return to school if they so desire and become eligible for additional financial aid. To apply for loan reinstatement you must complete the appropriate forms and have them approved.


Loan Consolidation

Borrowers may also become eligible for loan consolidation if they make three consecutive, voluntary, regular payments. Loan consolidation often affords borrowers a longer repayment term and lower monthly payments. Borrowers may be eligible to have a defaulted student loan consolidated without making any payments if they request an income contingent repayment option through the Direct Consolidation Loan Program.


After the loan is consolidated, the defaulted student loan is reported to the credit bureaus as paid.

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