Consequences of Defaulting on A Federal Student Loan

Definition of Default

  Default is a legal term which describes a borrower's failure to repay  a loan according to the terms agreed to when  he/she  signed a promissory note.  For the Federal Direct Student Loan Program, default  occurs when a borrower fails to make a payment for 270 days under the normal monthly repayment plan.

Avoiding Default

• Plan for Repayment - Borrow the minimum amount that you need while you are in school
  • Entrance Counseling
• Financial Management Tips for Students
  • Audio and Video Resources
• Graduation and Beyond
  • Exit Counseling
  • Federal Direct Student Loan Deferment Forms
  • Student Loan Default Facts and Repayment Tips for Struggling Borrowers
  • Services Offered to Alumni Through the Career Development Center
    • Office of Career Services (Law)
  • Loyola University Alumni Association - help us keep in touch with you !
  • Resources for Borrowers having difficulty repaying their student loans

Consequences of Default

The consequences of default are severe.  Loyola University New Orleans,  the lender or agency that holds your loan, the state and the federal government will normally all take legal action to recover the money you owe, including:

• Notifying national credit bureaus of your default. This may affect your credit rating for as long as seven years. For example, you might find it difficult to borrow money from a bank to buy a car;
  • More on why your credit rating matters
• The Internal Revenue Service can withhold you U.S. Individual Tax Refund and apply it to the amount you owe;
• The agency holding your loan might ask your employer to deduct payments  from your paycheck;
• You generally will be liable for loan collection costs;
• If you return to school, you  generally will not be eligible for additional federal federal aid .

Legislative Changes

Under provisions of the Ensuring Continued Access to Student Loans Act, lenders have the option to "PUT" (sell) loans to the U.S. Department of Education (DOE). Lenders must notify borrowers if their loans have been sold to the Department of Education.

This confusion can be blamed in large part to different servicing and repayment requirements for pre-ECASLA FFELP loans, post-ECASLA FFELP loans, and Direct Loans. FFELP borrowers with loans that were sold to the Department of Education through the Ensuring Continued Access to Student Loans Act (ECASLA) may have multiple entities servicing their loans, even if those loans were originated with the same lender. Separate servicing means separate billing and repayment plans and more confusion for borrowers. Even if borrowers' pre-ECASLA FFELP loans and their post-ECASLA FFELP loans are with the same servicer, the Department of Education is requiring separate billing and repayments on those loans since the ECASLA loans are federal assets and the FFELP loans are not.

Information on Federal Consolidation Loans

Students and parents who have borrowed through multiple lenders should investigate the benefits of consolidating their federal student loans with the Federal Direct Loan Program.

• General Information
• Special Direct Consolidation Loans - January-June 30, 2012

Additional References:

• Federal Student Loan Cohort Default Rates (General Overview)
• Cohort Default Rate Statistics and Additional References

Updated November 4, 2011