Prepare for Repayment and Prevent Default

February 10, 2022

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Managing federal student loan payments during residency can be difficult, but missing payments can lead to greater financial problems.  Know your rights and responsibilities so that you can prepare yourself for repayment. 

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Default Defined

Simply stated, default occurs when a borrower does not pay back their student loan debt, as agreed, and stated in the master promissory note. A promissory note is a legally binding contract that all federal student loan borrowers sign prior to receiving their loans. In the contract, borrowers commit to repaying the loan(s) on time - without exception.

Delinquent vs. Default

Before a loan goes into default, it will first be delinquent. As soon as one payment is missed, even if the payment is just one day late, the loan is delinquent. Your loan will be delinquent until you make your loan payment and bring the loan current. If your loan is delinquent for 90 days, your loan servicer(s) will report the delinquency to all three credit bureaus, TransUnion, Equifax, and Experian. A delinquency will negatively impact your credit score and could make it difficult for you to obtain additional credit, obtain insurance, or even get approved to rent an apartment.

Default is a more adverse status than a delinquent status. A loan will go into default status if payments are 270 or more days past due 

Consequences of Default

If you do not pay your loans and they go into default status, there are several possible consequences, many of which can be detrimental to your financial life. The consequences of default may include the following:

  • The entire balance of the remaining loan (along with interest) may become due and payable immediately.
  • The right to deferment, forbearance, and some repayment plans may be forfeited.
  • Eligibility for additional federal student aid is denied. A borrower’s default status will be disclosed to current and previous schools.
  • Loan(s) may be assigned to a collection agency and any additional expenses related to the collection of the loan are the borrower’s responsibility.
  • Credit bureaus will be notified of the default, which will damage the borrower’s credit score.
  • Federal and state tax refunds may be withheld to offset the defaulted loan(s).
  • Employers may be required to withhold wages for payment of debt.
  • Some schools may withhold institutional services such as providing transcripts or letters of recommendation.

Preventing Default

First and foremost, know the details of the debt that you acquired during your education (loan types, loan rates, names of servicers, etc.). You can find all your federal student loan information through the Federal Student Aid website.

Be aware of how your loans work, understand your responsibilities, manage your money by budgeting, keep track of your loan obligations, and maintain good records. These are all critical first steps to preventing default. If you are having problems repaying your loan(s), act. Ignoring the problem will not help; however, immediately dealing with your financial hardship can prevent delinquency and/or default.

If you can’t make your monthly payment, or if you find that your monthly payment is too high, contact your loan servicer(s) to see if a deferment, forbearance, or a different repayment plan may be an option.

If you are in residency, you qualify for a Mandatory Residency Forbearance, which can postpone required loan payments on an annual basis. Income-driven repayment plans are another option; they often provide a more manageable monthly payment because the payment is based on your income, not your debt. Consolidation may also be an option to help simplify repayment, and possibly lower monthly payments.

Contact your loan servicer for assistance and if you don’t know who your servicer is, log in to your Federal Student Aid account at studentaid.gov.

Getting Out of Default

To get out of default, the borrower has a few options. These include paying the loan(s) in full, rehabilitating the loan(s), or consolidation. If you are in default, the best thing you can do is reach out to the agency that is responsible for collecting your loan and discuss your options.

Money Management Resources from FIRST:

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