Defaulting on any student loan such as a Direct or Perkins Loan can have a number of negative impacts, not the least of which, on your credit profile. Credit bureaus report monthly on a borrower’s repayment history. A report of a delinquent or defaulted student loan can have potentially adverse effects on your ability to borrow money, be offered a good interest rate, obtain some types of employment, or even rent a place to live. Default on a student loan will also inhibit your ability to receive on-going financial aid, and so potentially block your academic progress.
Federal regulations governing student loans define a default as “failure of a borrower to make an installment payment due or to comply with other terms of the promissory note or written repayment agreement.”
For the purposes of this “How To”, let’s consider some scenarios that pertain to Direct and Perkins Loans that are delinquent with at least one payment thirty or more days late.
Scenario 1: Delinquent because student deferment not filed
The National Student Clearinghouse ( NSLC ) aggregates and reports student enrollment data submitted by registrars from around the country. Most colleges and universities will report student enrollment data to the NSLC every session once a student has passed their Add/Drop Period. In some cases, this update does not happen or does not fully resolve the payments outstanding on a student loan account. In addition, a small number of national institutions do not subscribe to the NSLC to report enrollment data.
If your delinquency is being caused by missing or incomplete enrollment reporting
- STEP 1: Contact your student loan lender(s) to ascertain the status of your loan(s) and find out what deferment data may be missing for resolving the loan. The solution will require the filing of a student deferment. Commit to the lender to resolve the matter by an agreed upon deadline date.
- STEP 2: Contact the Registrar’s Office of the school from which you need to obtain the deferment and ask that it certify your enrollment on a Student Deferment Form obtained from your lender(s). Alternatively, you could ask that the Registrar return the enrollment certification on the student deferment to you, so that you can send it to your lender(s) directly. With most schools, your enrollment is reported through the NSLC; with others, it is not. This aside, it remains your responsibility to ensure that your lender(s) have your deferment certification if you want your loans deferred.
- STEP 3: Contact the lender again after you think a sufficient amount of time has elapsed from the time the student deferment certification was sent to them in order to confirm that they have received the required deferment. Also, use this as an opportunity to confirm that the delinquency has been fully resolved or to find out what additional steps you may need to take to resolve any remaining issues with loan delinquency or default.
Scenario 2: Delinquent because payments due not remitted
- STEP 1: Contact your lender(s) to identify which payment(s) are owed to bring your account current. Ask the lender about the amount of any late fees due. If you are able to remit the amount needed to resolve the delinquency with just one payment, notify the lender of the date by which you can remit the payment due in order to confirm this will be acceptable. (If you are not able to pay the total amount due immediately or an amount and date acceptable to the lender, go to Scenario 2, STEP 3.)
- STEP 2: Contact the lender after a suitable amount of time has elapsed to confirm receipt of your payment and resolution of the delinquency. If the delinquency is now resolved, you need not take any further steps at this time. Just confirm with your lender that with your payment, your lender will now return your account back into regular billing and mark it is a current loan.
- STEP 3: Describe to your lender(s) the financial difficulty you face that prevents you from paying what is owed. In response, your lender should make you aware of options for hardship or unemployment deferment, forbearance, or temporary repayment plans to resolve the delinquency.
If your lender deems that either deferment or forbearance is the best resolution, they will instruct you on how to obtain the correct application form and tell you how and when to complete and return it for review. Follow their guidance on submitting to them your completed deferment or forbearance application along with any required documentation.
Alternatively, if you settle upon a temporary partial payment plan, remit the agreed upon payments according to the temporary schedule. In most instances, you will regain eligibility to receive federal financial aid funding after making at least six consecutive on-time monthly payments. Continue to make all the required payments on this payment agreement until your account is up to date or is paid in full.
- STEP 4: Contact the lender when you have met your obligation to resolve the delinquency and confirm that the account is back in good standing. If you applied for deferment or forbearance, the lender will send you an approval notification about the length of the period, any interest due, and when you are to resume normal billing. If you made payments on a temporary payment agreement plan, once current, your account reverts to the normal billing schedule.
Scenario 3: Referred to a collection agency
In this situation you can no longer just catch up on missed payments nor ask for deferment or forbearance. The entire balance of the loan plus interest and collection costs are due. So, what can you do?
- STEP 1: Contact the collection agency immediately to begin a resolution of the account. Being proactive, especially now, will work in your favor.
- STEP 2: Find out on whose behalf the collection agency is contacting you so you know on which loan you have defaulted.
- STEP 3: Discuss your options with the collection agency. Typically, resolutions occur through a monthly repayment agreement, a one-time payment in full that you yourself make, or a payment in full made through student loan consolidation. There is also the loan rehabilitation option which will help in rectifying your credit report and the negative impact. (see How To Rehabilitate Your Loans )
Note that this is a general guide. We strongly recommend you always communicate directly with your lender regarding your rights and obligations related to your Direct, Perkins or particular type student loan.
(UCLA attempts to provide up-to-date information in our Bruin Dollars and $ense How To Series. Please be aware that the content of this document is based upon information that was correct at the time of publication. All information pertaining to and gathered from both UCLA and other sources is subject to change without notice.)