FAQ About Student Loans in Default

Answers to the top 20 FAQ about issues concerning bankruptcy, closed schools, death, disability, false certification, forgery, and teacher and military cancellation and what to do about collection agencies and how to dispute student loans!

1. Balance Disputes

If you claim to have repaid a portion of the loan which is not reflected in your current balance, or to have repaid the loan in full, you should send copies of the canceled payment instruments (i.e., checks, money orders) used toward repayment of the loan and any other pertinent information to the agency servicing your loan.

2. Collection Agencies

This information is provided only for student loan borrowers with loans held by the U.S. Department of Education (DoE).

The Department of Education currently contracts with several collection agencies to administer many of the collection activities of their accounts. Only those accounts which fail to establish and adhere to a repayment arrangement are subject to assignment to a collection agency by the Department’s Debt Collection Service. Accounts assigned to collection agencies incur additional collection costs.

Collection agency employees must comply with the terms of the Fair Debt Collection Practices Act, which governs collection practices by debt collectors. Contact the collection agency that services your account anytime you change your mailing address, or for balance information.  If you are unsure which agency is servicing your defaulted student loan(s), call 1-800-4-FED-AID (1-800-433-3243) for an address and telephone number of the agency which holds your defaulted loan(s).

3. Default Status

If you’re claiming that your loan was not in default, you must provide evidence of that.

In most cases the loan was declared in default by some organization other than the guaranty agency or the Department. For NDSL/Perkins loans, you must contact the school, and, if the school determines the loan was not in default, the school may request the loan back.

For FFEL loans, the guaranty agency that paid the insurance claim on the loan determined that the loan was in default, so you must contact the agency and demonstrate the loan is not in default.

If the organization which declared the loan in default is now closed, you must provide specific evidence that you took timely and appropriate actions, such as notification of the lender, submitting appropriate forms for deferment, and that the organization defaulted the loan in error.

4. Incarceration

Borrowers who are incarcerated should request an “Incarceration Verification” form from the agency servicing the loan. This form should be completed by the Warden or other appropriate official of the institution where the borrower is incarcerated. Return it to the servicing agency.

5. Infancy (signing of a contract by a minor)

The defense of infancy is an argument that the signing of a contract by a minor would not create a binding obligation. The defense of infancy is no longer a valid defense against collection of a student loan by virtue of Section 484A(b)(2) of the Higher Education Act of 1965 (20 U.S.C. 1091a(b)(2)).

6. Ownership of Loan

If you are claiming that your name and/or social security number (SSN) is associated with a student loan that you did not receive:

If you claim that both your name and SSN is incorrectly associated with a student loan account, request a copy of the promissory note from your loan holder before possibly alleging forgery.

If you claim that only your SSN is incorrectly associated with a student loan account, but not your name, mail or fax copies of the following documents to your loan holder:

    • SSN card;
    • birth certificate; and
    • either your driver’s license, state identification card, U.S. passport, military identification, or INS 551.

If it is determined that your SSN was erroneously assigned to a student loan account, your SSN will be deleted from their database.

If you claim that your name, and perhaps your address, is associated with a student loan account, but the SSN is different, it may very well be that the wrong person has been contacted because of the similarity with your name. Contact your loan holder ASAP.

7. Never Contacted

You must make payments on your loan even if you do not receive a bill or repayment notice.

Billing statements are sent to you as a convenience, and you are obligated to make payments even if you do not receive any notice from the holder of the loan. If you have not received any billing statements, you may not have properly notified the servicing agency of your current address. You should do so immediately.

8. School Complaints

Borrowers frequently raise, as defenses or objections to repaying a student loan, complaints they have about the quality of the educational services or other acts or omissions by the school they attended.

Banks or other financial institutions made most of the loans collected by the Department, and the borrower’s loan contract with that lender is separate and distinct from the borrower’s enrollment agreement with the school.

Failure by the school to deliver services under the enrollment contract may well give the student a claim against the school, but generally that claim against the school does not excuse you from honoring your separate loan contract with the lender.

Students bear responsibility for examining before they enroll whether a school offers training that meets their academic and vocational needs. Borrowers who have claims against schools should raise those claims against the school directly or through State consumer protection licensing authorities.

In some instances the Department treats complaints against the school as valid grounds for reducing or cancelling your obligation to repay a student loan. For example, the Department can reduce the loan liability for borrowers who prove they they withdrew from enrollment, and were therefore owed, but did not receive, a refund of tuition and fees.

9. Statute of Limitations

Regardless of the age of the debt, statutes of limitation are no longer valid defenses against repayment of a student loan.

Section 484A(a) of the Higher Education Act, removes all limitations and gives the DoE or the guaranty agency the ability to file suit, enforce judgments, initiate offsets, or other actions, to collect a defaulted student loan.

10. Transcript Release

You may have been told by a school that your academic transcript will not be released unless your defaulted student loan is satisfied. There is no Federal law that allows the guaranty agency or the DoE to tell schools to not to release academic transcripts. The DoE’s role is simply to inform schools of the current status of your account.

Academic transcripts are the property of the school thus, it is the school’s responsibility to decide whether or not to release the transcript to you.

11. Unable to Pay

If you cannot afford to make payments toward your defaulted loan, you should complete and return a “Statement of Financial Status” along with evidence of your current financial situation.

Submit evidences to support your claim (paycheck stubs, cost of rent, food and utilities and copies of billing statements) to the servicing agency or the collection agency servicing your account.

Based on the information provided, a payment plan which is both acceptable to the agency, and affordable to you, will be established.

12. Repaying Student loans held by the U.S. Department of Education

After graduating, leaving school, or dropping below half-time enrollment, you have anywhere from six to nine months before you must begin repayment. You will normally receive information about repayment and when your loan repayment begins.

13. Addressing Your Defaulted Student Loan(s)

If you default on your student loan, the maturity date of each promissory note is accelerated making payment in full immediately due, and you are no longer eligible for any type of deferment or forbearance.

Continued failure to repay a loan in default may lead to several negative consequences for you over the long-term, including having your wages garnished, losing your eligibility for other federal loans like FHA or VA, and having your Federal income tax withheld.

However, there are now more ways than ever before to repay your defaulted student loan and certain programs even can even remove your loan from its defaulted status. Determining which repayment option that is right for you depends on what your objective is.

14. How can I make monthly payment that are affordable to me?

All guaranty agencies and the U.S. Department of Education will accept regular monthly payments that are both reasonable to the agency and affordable to you.  You should call 1-800-621-3115 and one of customer service representatives will assist you with determining a repayment amount that is right for you.

15. How can I reestablish my eligibility for federal financial aid?

It is now easy to restore your eligibility to receive additional Title IV federal financial aid. Your options are:

Repay or satisfy the loan in full.

Make six agreed-upon monthly payments over a six month period. Your payment amount must be approved in advance by the Department. Every qualifying payment must be timely (received before the due date) and you cannot make all six payments as a single lump sum payment.

Once your eligibility to receive additional federal financial aid has been restored after making six consecutive monthly payments, you must continue to make timely monthly payments to maintain your eligibility or else it will be permanently lost until the debt is resolved entirely. In other words, you may qualify for this program only once.

Consolidate your loan! Since defaulted student loans have no statute of limitations for enforceability, you remain ineligible for additional federal financial aid until you either meet the criteria above or pay off the loan.

16. My HUD (FHA) or VA loan was denied due to my defaulted loan(s)?

Your options for reinstating eligibility to receive a HUD (FHA) or VA loan are:

Repay or satisfy the loan in full;

Make six agreed-upon monthly payments over six months and then continue making payments on time; or

Consolidate your loans and then make six agreed-upon monthly payments over a six month period.

17. My defaulted loan hurt my credit; What can I do to improve it?

There are several things that you can do to at least partially, and in some cases, fully restore your credit record. Your options include:

Repay or satisfy the loan in full;

Consolidate your loans and then make all agreed-upon monthly payments on time.

18. Can I pay my defaulted student loan by credit card?

Absolutely! American Express, Discover, Master Card and Visa are accepted. To repay a loan by credit card, call us at 1-800-621-3115.

19. What address do I send my payments to?

Mail a check or money order (include Social Security Number) to the address below. If you are at all unsure about the status of your loan, or who currently holds your loan, call 1-800-621-3115 before sending in payment.

National Payment Center
P.O. Box 4169
Greenville, TX 75403-4169

20. I’m facing loan default; now what?

For student loans authorized under Section 435(i)Title IV of the Higher Education Act, default occurs on an FFEL loan after default has persisted for 270 days in the case of a loan repayable in monthly installments or 330 days in the case of a loan repayable in less frequent installments.

The change is effective for loans for which the first date of delinquency occurred on or after October 7, 1998.

During the delinquency period, the lender must exercise “due diligence” in attempting to collect the loan; that is, the lender must make repeated efforts to locate and contact you about repayment.

If the lender’s efforts are unsuccessful, it will usually take steps to place the loan in default and turn the loan over to the guaranty agency in your state.

Lenders may “accelerate” a defaulted loan, which means that the entire balance of the loan (principal and interest) becomes due in a single payment.

Once your loan is assigned to a guaranty agency or the U.S. Department of Education for collection, the following steps may be taken to recover the outstanding balance due:

    • The U.S. Treasury may withhold your payments toward repayment of your loan.
    • You may have to pay additional collection costs after your loan is assigned to a private collection agency for collection.
    • Also, you may be subject to Administrative Wage Garnishment,whereby the Department will require your employer to forward 10% to 15% of your disposable pay toward repayment of your loan.
    • Federal employees face the possibility of having 15% of their disposable pay offset by the Department toward repayment of their loan through the Federal Employee Salary Offset Program
    • The Department may take legal action to force the you to repay the loan.
    • Finally, credit bureaus may be notified, and your credit rating will suffer.

Once a loan is declared in default, you are no longer entitled to any deferments or forbearances until you have made payments of an approved amount for at least six consecutive months. In addition, you may not receive any additional Title IV Federal student aid if you are in default on any Title IV student loan.

21. Collection Costs

According to the Higher Education Act and the terms of most borrowers’ promissory notes, you are liable for the costs of collecting your defaulted Federally-financed student loans.

The largest of these costs is usually the cost of contingent fees that may be incurred to collect the loan. The Department gives you repeated warnings and, if those warnings do not persuade you to reach repayment terms, they refer the loan(s) to collection contractors.

The contractors earn a commission, or contingent fee, for any payments then made on those loans. The Department charges each borrower the cost of the commission earned by the contractor and applies payments from that borrower first to defray the contingent fee earned for that payment and then to interest and principal owed on the debt.

As a result, the amount needed to satisfy a student loan debt collected by the Department’s contractors will be up to 25 percent more than the principal and interest repaid by the borrower. On each billing statement, the Department projects an estimate of the total amount needed to satisfy the debt on the date of the statement, including collection costs that would be incurred by payment in full of that amount.