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Debt Reduction Education

1 - Your Debt2 - Your Budget3 - Reducing Your Debt4 - Debt Consolidation5 - Federal Student Loans6 - Avoiding Debt7 - Resources




Avoiding a Loan Default

When your loan grace period ends, you must start to repay the loan.  If you can’t make the payments, you should immediately make arrangements to pay the loans back or you’ll be in default.  If you don’t keep up with your loan payments you will also be in default.  If you have a Direct or FFEL loan and your 270 days behind in your payments, you will be in default.  If you are repaying the loan on a different schedule you will be in default after 330 days.  With the Perkins Loan, you are in default after just missing 1 payment.

The consequences for defaulting on your federal student loan are serious.  They include:
  • Your credit report will be damaged.
  • Your wages maybe garnished depending if your state allows it.
  • You maybe sued by your lender.
  • Your loan maybe given to a debt collection agency.
  • Your maybe denied a professional license depending if your state allows it.
  • The full amount of your loan maybe due immediately.
  • You will not be eligible for a loan forbearance or deferment.
  • You will not be eligible for additional federal financial aid.
  • Your federal and/or income tax return seized and applied to the balance of your loan.
To avoid a default if you run into problems with making payments is to immediately contact your lender to work out an agreement or strategy such as switching to a less expensive repayment plan.  If this doesn’t work, you can pursue a loan deferment or forbearance or file bankruptcy to avoid a default.

If you have multiple student loans and have already defaulted on one or more, you maybe avoid default if you consolidate the loans to lower your payments.  Contact your lender to determine if student loan consolidation is an option.

Deferring Payments

If you run into problems repaying your federal student loan, you may request a loan deferment which stops your loan payments for a limited period of time which is normally no more than 3 years.  You will not have to make a loan payment within this time.

If your loan deferment is an unsubsidized Stafford Loan, interest will accrue during the deferment period.  You will end up owing more at the end of the deferment period, unless you make an interest payment each month.

The process differs with lenders on how to apply for a loan deferment but it usually involves completing an application and you must meet certain eligibility requirements.  Typically, for you to be eligible for a loan deferment you must meet at least one of the following requirements:
  • You lost your job.
  • You are in the military.
  • You are enrolled in an eligible school at least half-time.
  • You will financial hardship if you make loan payments.
  • You are in a graduate fellowship program.
If you are still paying on a Stafford Loan received before 7/1/1993, you maybe entitled for a loan deferment other than the reasons listed above.

While waiting to hear if you are approved / denied a loan deferment, you must continue making payments to avoid a loan default.  If your loan goes into default, you will not be eligible for a loan deferment.

For additional information about the terms and conditions to qualifying for a loan deferment visit the DOE’s Federal Students Aid website at and clicking on “Publications” on the right of the page and scrolling down to find the publication titled “Repaying Your Student Loan”.

Loan Forbearance

If you are unsuccessful in obtaining a loan deferment, you maybe able to use a forbearance to avoid a loan default.  Forbearance will postpone your loan payments or reduce the loan to a specified period of time, normally 1 to 3 years.   You will have to pay interest on the loan during the forbearance time-from but you can have the accrued interest added to the outstanding balance of the loan.

Obtaining forbearance, you have to apply with your lender and prove that you qualify to getting a temporary break from your federal student loan obligations.  A possible reason for obtaining forbearance includes but is not limited to the following:
  • Personal reasons, such as poor health, make it difficult for you to make monthly payments.
  • The monthly loan payment is greater than 20% of your gross monthly income.  This applies only to certain types of federal student loan.
  • You have a medical / dental residency or internship.

If you have tried everything to avoid a loan default, your last option maybe to consider bankruptcy.  You must have serious financial problems and you must prove to the court that you made a good faith effort to repay the loan.  You may try first filing for a “hardship discharge”, however this is difficult to obtain.  If you apply for a hardship discharge, you must attend a court hearing with a bankruptcy judge who determines if you qualify.  Your lender also attends the hearing if they object to the hardship discharge.

If you are denied hardship discharge, you may still file bankruptcy to avoid a default.  If you file Chapter 7 liquidation bankruptcy, you will not have to make payments while you are in the bankruptcy process.  However, you’ll be expected to make payments when the bankruptcy process is over.  Since Chapter 7 eliminates other types of debts, you should be in a better financial position to repay your student loan obligations.

If you file Chapter 13 bankruptcy, you will have 3 to 5 years to repay the remaining principal of your student loan.  You will not be required to pay the past-due interest while you are in bankruptcy, however, you must pay it afterwards. Additionally, you must pay all current student loan payments when due.

Loan Rehabilitation

If you defaulted on your student loan, you can undo the damage via loan rehabilitation.  If you complete the loan rehabilitation process successfully, your loan will no longer be in default.  The default information will be removed from your credit history, your wages will stop being garnished and you won’t have to worry about your tax refunds being seized.  Additionally, you will be eligible to apply for future federal student loans and other types of federal loans.

To quality for loan rehabilitation, your lender must agree to a rehabilitation plan and the following:
  • Loan payment amount during the rehabilitation period.
  • Number of payments your must make.  Normally 12 on-time consecutive monthly payments.
  • When payments are due.
Details of your rehabilitation plan depend on the type of loan you defaulted on and the agreement between you and your lender.  After satisfying the terms of your loan rehabilitation, you must resume paying the loan based on the terms of the original loan agreement.

If you rehabilitate a FFEL Loan, the DOE will make the loan available for purchase by the lending company that participates in the FFEL program.  Your loan may end up with a different lender.

To find out more about loan rehabilitation contact the DOE’s Federal Student Aid Ombudsman at 877-557-2575 or visit


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