Default Prevention Frequently Asked Questions

1. What is default and how does a loan enter default?
2. What is the difference between default and delinquency?
3. What are the consequences of defaulting on my student loan?
4. How does my loan enter delinquency status?
5. How do I pay back my FFEL Stafford loan?
6. How do I make payments on my loan?
7. How do I determine who I should be paying?
8. When does repayment for my loan begin?
9. What happens if I fall behind on my payments
10. Will I always make my payments to the same lender?
11. What is loan servicing?
12. Is there a prepayment penalty?
13. Is it ever possible to postpone repayment of my loan?
14. Can my loan be discharged or cancelled?
15. What is consolidation?
16. Who is eligible for a FFEL Consolidation loan?
17. What kinds of loans can be consolidated under a FFEL Consolidation loan?
18. What is the interest rate charged on these loans?
19. What is capitalization of interest?
20. Do I have to contact my lender after I leave school?
21. What is the difference between subsidized and unsubsidized loans?

1. What is default and how does a loan enter default?
   Your loan is declared default if you have missed 9 payments and clearly do not intent to honor your loan obligation.
   
   Prior to a loan being declared in default, your lender and/or guarantor will make numerous attempts to contact you to resolve the situation. After your loan is declared default, the remaining balance of the loan and all interest will become immediately due and payable.
   
   
2. What is the difference between default and delinquency?
   If you miss one payment, your account is considered delinquent. If your account is 9 months past due, then your account enters default.
   
   
3. What are the consequences of defaulting on my student loan?
   Failure to repay the loan may result in any of the following:

   Adverse credit when the default is reported to all national credit bureaus. This may affect your ability to obtain financing for cars, houses, etc. Default reported to the Internal Revenue Service, causing Federal and/or state tax refunds to be withheld and applied to the loan balance Garnishment of your wages Collection of necessary costs involved with collecting your debt Assignment of your loan to a collection agency Loss of other Federal or state payments Loss of eligibility for further assistance from any Title IV Program, including the Federal Pell Grant, the Federal Supplemental Educational Opportunity Grant, Federal work-study, Academic Competitiveness Grant (ACG), National Science and Mathematics Access to Retain Talent Grant (SMART), Federal Family Education loans, and Perkins loans Loss of eligibility for repayment options, deferments, and interest benefits as described on the Master Promissory Note (MPN) Denial of professional licenses (in some states) Lawsuit and the liability of court-legal expenses

4. How does my loan enter delinquency status?
   Your loan enters delinquency status if you miss one payment. The lender will report the delinquency to the guarantor. The guarantor will initiate a series of attempts to contact you in an effort to help you manage your debt burden and get back on track with your payments. If the situation is not corrected, then your loan will likely go into default.
   
   
5. How do I pay back my FFEL Stafford loan?
   There are four repayment plans that are available to you if your first Federal Family Education Loan (FFEL) Program loan was disbursed on or after July 1, 1993. All the repayment plans require you to repay the loan within 10 years.
   
   
6. How do I make payments on my loan?
   Lenders use different methods. Most commonly, borrowers are issued coupon books or monthly statements. Some lenders may be able to automatically withdraw payments from your checking account if you so choose.
   
   If the lender offers you a choice of payment options, choose the one that is most convenient for you. Contact your lender to see what options are offered.
   
   
7. How do I determine who I should be paying?
   Your lender will send you a coupon book or monthly statement that indicates where payments should be sent.
   
   
8. When does repayment for my loan begin?
   If you borrow under the subsidized Stafford loan program, payments of principal and interest start six months after your school enrollment drops below half-time status. During the six-month grace period, the Federal government pays the interest that accrues on the subsidized loan.
   
   If you borrow under the unsubsidized Stafford loan program, payments of principal and interest start six months after your school enrollment drops below half-time status. However, as soon as the unsubsidized loan is disbursed, it begins accruing interest. You can choose to pay the interest in monthly or quarterly installments, or you can defer interest until it is time to begin repaying the loan principal.
   
   If you consolidate your loans under the Federal Consolidation loan program, the first principal payment is due within 60 days after the loan is fully disbursed to the lender holding your underlying loans. Interest begins to accrue the day the loan is fully disbursed.
   
   
9. What happens if I fall behind on my payments?
   If you fall behind on your payments, contact your lender and/or guarantor. You may be eligible for a deferment or forbearance.
   
   If you fail to make timely payments and your account becomes more than 9 months delinquent, you will be in default. Your account will be assigned to a guarantor for collection. Your default will be reported to a national credit bureau and will become part of your credit record, making it difficult for you to get other types of credit. You may face additional consequences if your loan enters default.
    
   
10. Will I always make my payments to the same lender?
    Not necessarily. Sometimes lenders sell loans to other lending institutions or secondary markets. This frees up capital so the lender can make more student loans.
    
    If your loan is sold, you will be notified in writing and given instructions for making payments. After such notification, make all subsequent communications with this new holder of the loan.
    
    This sale of your loan does not affect the amount you will pay or the terms of repayment, provided you do not default on your loan obligation.
    
    
11. What is loan servicing?
    Some lenders and secondary markets employ servicers to manage their student loan portfolios. Unlike a loan that has been sold, under servicing, the lender retains ownership of its loans but contracts administrative functions, such as billing, inquiries, etc.
    
    Whether your loan is serviced by your original lender, a secondary market or a servicing contractor, maintain close contact with the appropriate party. SLGFA's participating lender list includes servicer information.
    
    
12. Is there a prepayment penalty?
    No. You may prepay at any time without penalty.
    
    Unless you request otherwise, a prepayment received during a period when regular payments are due must be applied to future installments if the payment received equals or exceeds the regularly scheduled payment amount. The total amount of interest you pay can be reduced if you make loan payments during the grace period or if you pay more than your scheduled payment.
    
    
13. Is it ever possible to postpone payment of my loan?
    Yes. Under certain circumstances, you can receive a deferment or forbearance on your loan.
    
    A deferment allows you to temporarily postpone payments on your loan. If you have a subsidized Stafford loan, you will not be charged interest during the deferment. If your loan is unsubsidized, you will be responsible for the interest on the loan during deferment.
    
    If you are temporarily unable to meet your repayment schedule but are not eligible for a deferment, you may receive a forbearance for a limited and specified period. During forbearance, your payments are postponed or reduced. Interest continues to accrue during forbearance.
    
    
14. Can my loan be discharged or cancelled?
    Yes. In certain circumstances, a discharge may release you from all obligations to repay the loan.
    
    Your loan may be fully or partially discharged/cancelled if the following circumstances occur:
    

    Borrower's total and permanent disability or death Full-time teacher for 5 consecutive years in a designated elementary or secondary school serving students from low-income families Childcare provider who completed a degree in early childhood education and has been employed full-time in a childcare facility in a low-income community for 2 consecutive years (must be new borrower as of October 1, 1998) Bankruptcy (in rare cases) Closed school (before student could complete program of study) False loan certification School does not make required return of loan funds to the lender Your loan cannot be discharged because you did not complete the program of study at the school (unless you were unable to because the school closed), did not like the program of study, or did not obtain employment after completing the program of study. For more information about Total and Permanent Disability (TPD) Discharge, visit the Department of Education's Web site.

15. What is consolidation?
    Consolidation loans combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balance on the other loans.
    
    You should keep in mind that although consolidation can simplify loan repayment and lower your monthly payment, it also can significantly increase the total cost of repaying your loans, and once a Federal Consolidation Loan is made, it cannot be unmade.
    
    Use the Loan Consolidation Calculator to see if this option is for you.
    
    If you don't need monthly payment relief, you should compare the cost of repaying your unconsolidated loans against the cost of repaying a consolidation loan.
    
    You also should take into account the impact of losing any borrower benefits offered under non-consolidated repayment plans. Borrower benefits, which may include interest rate discounts, principal rebates, or some loan cancellation benefits can significantly reduce the cost of repaying your loan.
    
    
    
16. Who is eligible for a FFEL Consolidation loan?
    You can get a Federal Family Education Loan (FFEL) Consolidation loan during your grace period or once you have entered repayment. If you are in default on a Federal education loan, you may be able to receive a FFEL Consolidation loan provided the defaulted loan is not subject to a judgment or wage garnishment.
    
    
17. What kinds of loans can be consolidated under a FFEL Consolidation loan?
    Most Federal student loans and Federal Family Education Loan (FFEL) PLUS loans can be consolidated. To qualify for a Federal Consolidation loan, you must meet the following eligibility criteria at the time you apply for the consolidation loan:
    

    You must be in the grace period or have entered repayment on each loan chosen for consolidation. If any Title IV loans being considered for consolidation are in default, you must either make satisfactory repayment arrangements with the holder of each defaulted loan or agree to repay the consolidating lender under an income-sensitive repayment schedule.

18. What is the interest rate charged on these loans?
    For new Federal Stafford loan applications made on or after July 1, 2006, the interest rate changed from variable to a fixed interest rate of 6.8 percent. Any Federal Stafford loan made prior to that date will be calculated with a variable interest rate.
    
    As of July 1, 2009, the interest rate for a subsidized Stafford loan was reduced to 5.6 percent.
    
    The interest rate on your loan could change each year of repayment if it has a variable interest rate, but, by law, it will never exceed 8.25 percent.
    
    The interest rate is adjusted annually on July 1. You will be notified of interest rate changes throughout the life of your loans. View this interest rate chart to see the interest rate changes that will become effective July 1, 2010.
    
    
19. What is capitalization of interest?
    Capitalized interest is accrued interest added to the borrower's outstanding principal.
    
    If you are an unsubsidized Federal Stafford loan borrower, you are responsible for all interest that accrues on your loan during in-school, grace, deferment, and forbearance periods. During these periods, you may either make monthly or quarterly interest payments, or you make ask your lender to capitalize the interest. Subsequent interest accrues on the new total principal balance, which includes any capitalized interest.
    
    
20. Do I have to contact my lender after I leave school?
    Yes. You must report to your lender any changes in your enrollment status, the school that you are attending, your permanent mailing address, your name, your telephone number, or your graduation date.
    
    This not only demonstrates good faith, it is a requirement on your promissory note.
    
    
21. What is the difference between subsidized and unsubsidized loans?
    A subsidized loan is awarded on the basis of financial need. You will not be charged any interest before you begin repayment or during authorized periods of deferment. The Federal government subsidizes the interest during these periods.
    
    An unsubsidized loan is not awarded on the basis of need. You will be charged interest from the time the loan is disbursed until it paid in full. If you allow the interest to accumulate, it will be capitalized. You also have the option to make interest-only payments while you attend school.