Delinquency & Default Protection

Defaulting on Student Loans

This section of Financial Aid provides information to students who are thinking about defaulting on their loans. It summarizes the consequences of default, gives advice on how to avoid it and, if you're already in default, how to get out of it.

You are responsible for repaying your student loans even if you do not graduate, have trouble finding a job after graduation, or just didn't like your school. If you do not make any payments on your student loans for 270 days and do not make special arrangements with your lender to get a deferment or forbearance, your loans will be in default. Defaulting on your student loans has serious consequences.

Note that student loans are now generally not dischargeable through bankruptcy.

Almost three-quarters of students who default on their loans have done so after withdrawing from school and failing to complete their studies.

Federal Guide to Defaulted Student Loans

The US Department of Education Debt Collection Service publishes a guide called Guide to Defaulted Student Loans to help students repay their defaulted student loans. It includes information about repaying a defaulted student loan, loan consolidation, the consequences of default, collection costs, resolving disputes, ineligibility for further Federal student aid, and related topics. For more information on repaying a defaulted loan, call 1-800-4-FED-AID (1-800-433-3243) or 1-800-621-3115.

Other helpful web sites include:

National Student Loan Data System (NSLDS)
FSA Ombudsman
Closed Schools Student Loan Discharges

Consequences of Default

If you default on your student loan:

Your loans may be turned over to a collection agency.
You'll be liable for the costs associated with collecting your loan, including court costs and attorney fees.
You can be sued for the entire amount of your loan.
Your wages may be garnished. (Federal regulations limit the amount that may be garnished to 10% of the borrower's take-home pay.)
Your federal and state income tax refunds may be intercepted.
The federal government may withhold part of your Social Security benefit payments. (The US Supreme Court upheld the government's ability to collect defaulted student loans in this manner without a statute of limitations in Lockhart v US (04-881, December 2005).)
Your defaulted loans will appear on your credit record, making it difficult for you to obtain an auto loan, mortgage, or even credit cards. A bad credit record can also affect your ability to find a job.
You won't receive any more federal financial aid until you repay the loan in full or make arrangements to repay what you already owe and make at least six consecutive, on-time, monthly payments. (You will also be ineligible for assistance under most federal benefit programs.)
You'll be ineligible for deferments.
Federal interest benefits will be denied.
You may not be able to renew a professional license you hold.

And of course, you will still owe the full amount of your loan.

Preventing Default

Make sure you understand your options and responsibilities before taking out a loan.
Make your payments on time.
Notify your lender or servicer promptly of any changes that may affect the repayment of your loan. If you move or change your address, let them know. Likewise tell them about name changes (e.g., because of marriage), graduation or termination of studies, leaves of absence and transfers to another school.
If you encounter financial difficulties, consider applying for a deferment or forbearance on your loans. It is better to defer your payments than to go into default. Ask your lender about these options while you are still making payments, before you default on your loan. You won't be able to get a deferment or forbearance after you default.
If you are having trouble making payments, your lender may be able to suggest alternate repayment options, such as graduated repayment, income sensitive repayment and income contingent repayment. The types of available repayment options currently depend on whether the loan was issued under the FFELP or FDSLP (Direct) programs.
Consider using a consolidation loan to combine all of your educational loans into one big loan. This lets you send your payments to just one lender. You may also be able to extend the term of the loan in order to reduce the size of your monthly payments.
Keep careful records regarding your loan. Put copies of all your letters, canceled checks, promissory notes, notices of disbursement and other forms in a file folder.

Postponing Repayment

Two options available for postponing repayment of your student loans are deferments and forbearances. If you are thinking about defaulting on your student loans, ask the lender whether you are eligible for a deferment or forbearance before you default. You cannot receive a deferment or forbearance if your loan is in default. If you default on your loans, you are no longer eligible for deferments and forbearances.

For more information about deferments and forbearances, contact the financial aid office at the school that issued the loan and/or the original lender or current servicer of your loan.

Deferments

During deferment, the lender allows you to postpone repaying the principal of your loan for a specific period of time, making your California law school debt more affordable.

Most federal loan programs allow students to defer their loans while they are in school at least half time. For Perkins Loans and Subsidized Stafford Loans, no interest accrues during the deferment period because the federal government pays the interest. For other loan programs, such as the unsubsidized Stafford loan, the interest still accrues during the deferment period. Students can postpone the interest payments on such loans by capitalizing the interest, which increases the size of the loan. (Capitalizing the interest adds it to the loan principal. This increases the amount of the debt, which means you'll be paying interest on interest, in addition to interest on the principal.)

Deferments are commonly granted for

students who are enrolled in undergraduate or graduate school,
disabled students who are participating in a rehabilitation training program,
unemployment
economic hardship

These deferments are for the FFELP and FDSLP loans, not the Perkins loan. Other deferments may also be available; contact your lender for details. Note also that there are limits on the length of a deferment.

Deferments are not granted automatically. You must submit an application and provide documentation to support your request for a deferment. Do not stop making payments on your student loans until after you are notified that your deferment has been granted.

Forbearances

During forbearance, the lender allows you to postpone or reduce your payments, but the interest charges continue to accrue. The federal government does not pay the interest charges on the loan during the forbearance period. You must continue paying the interest charges during the forbearance period. Forbearance is one way of making your debt from law school studies in California more affordable.

Note also that there are limits on the length of forbearance. Forbearances are typically granted in 12-month intervals for up to three years.

Forbearances are not granted automatically. You must submit an application and provide documentation to support your request for a deferment. Forbearances are granted at the lender's discretion, usually in cases of extreme financial hardship or other unusual circumstances when the borrower does not qualify for a deferment. Do not stop making payments on your student loans until after you are notified that your forbearance has been granted.

Getting Out of Default

To get out of default, you need to make arrangements with your servicer or lender to repay the loan. Once you have made six regular payments, you will be eligible for additional Title IV aid. After you have made twelve regular payments and applied for and received "rehabilitation", you will no longer be considered in default. At this time record of the default will be removed from the reports to credit reporting bureaus.

For information about your options, contact the servicer of the loan and/or the original lender. The financial aid office at your school should be able to tell you the name, address and telephone number of your lender and can also provide you with help and advice about repayment problems. The financial aid office is there to help you make your debt from California law school more affordable.

Collection Agencies

If you default on your student loans, the lender or guarantor may use a collection agency to collect the loan. The collection agency's costs are added to the amount due, and the borrower is required to repay them in addition to the amount due on the loan.

Federal regulations state that a borrower who has defaulted on his or her student loans may be required to pay reasonable collection costs in addition to other charges, such as late payment fees. What constitutes reasonable is not very well defined.

Federal regulations concerning campus-based loan programs, such as the Perkins Loan, suggest that collection costs may not reasonably exceed 30% of the principal, interest and late charges collected on the loan, plus any court costs, for first collection efforts. For second collection efforts, the percentage increases to 40%. For Perkins loans made from 1981 through 1986, many promissory notes limited collection costs to 25% of the outstanding principal and interest due on the loan. Since then, however, promissory notes have had no such restriction.

For loans held by the US Department of Education (e.g., Federal Direct Stafford Loans), the department assesses collection costs at a rate of 25%.

When consolidating a defaulted loan, collection costs of up to 18.5% of the outstanding principal and interest may be included in the amount consolidated. A collection agency might be willing to reduce its fees to 18.5% if the student consolidates his or her loans, but the collection agency is under no obligation to do so. If the student consolidates his or her loans and the collection agency does not reduce its fees, the student must pay the amount in excess of 18.5%.

If you work out a payment schedule within 60 days of default, some collection agencies will waive or reduce the collection fee.

Overall, it appears that collection costs can legally be as high as 40%, perhaps even higher.

If you think the collection costs are excessive, you can ask the collection agency to provide a detailed itemization of the actual costs incurred in collecting the loan. Although federal regulations are murky on this point, it appears that the costs must be based on either the actual costs incurred in collecting the loan or the average costs incurred for similar actions taken to collect loans in similar stages of delinquency.