Prepare for Repayment and Prevent Default

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

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 a number of possible consequences, many of which can be detrimental to your financial life.

The consequences of default include any or all of 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.

Though the consequences are severe; the good news is that default can be avoided.

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.). 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), take action. Ignoring the problem will not help; however, dealing with your financial hardship immediately can prevent delinquency and 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 alternative repayment plan may be an option. Income-driven repayment plans often allow for more manageable monthly payments 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 servicer for assistance in determining what would be your best option. To determine who is servicing your federal student loans, log in to the National Student Loan Data System.

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 loan 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.

Financial Information, Resources, Services, and Tools (FIRST)

MedLoans® Organizer and Calculator (MLOC)

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The MedLoans® Organizer and Calculator was developed to assist medical students and residents with managing their education debt.

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