Default of Federal Student Loans

If you do not repay your loan(s) on time, it will become delinquent and can possibly default. Default occurs when a borrower has not made payments for more than 270 days, and the guaranty agency purchases the loan from your lender.  This has serious consequences and is very damaging to your credit rating, since defaulted loans are reported to all national credit bureaus.

Consequences of Default
Identify Your Loan Holder
Repayment Schedule
Payment in Full
Federal Loan Rehabilitation
Reinstatement of Federal and State Student Aid Eligibility
Loan Consolidation
Frequently Asked Questions (FAQ’s)

Consequences of Default

• Immediate demand for full payment to the guaranty agency of your loan, including principal, interest and other charges
• An adverse credit rating that will impact your ability to borrow money for other things, such as a home, a car and credit cards.  Record of the default will remain on your credit report for seven years after the loan has been paid in full.
• Loss of your eligibility for all federal and state student aid programs, including any future student loans
• Loss of any possible deferment and forbearance options
• Reporting of your defaulted status to the U.S. Treasury Department and the Illinois Department of Revenue, causing your federal and state tax refunds to be withheld and applied to the outstanding loan balance
• Assessment of additional fees (up to 25% of principal and interest)
• Assignment of your loan to a collection agency
• Garnishment of your wages
• Non-renewal, revocation or suspension of certain professional licenses, jeopardizing your chances for certain types of employment
• Legal action against you
• Assignment of your loan to the U.S. Department of Education for collection, resulting in additional collection fees

To help you manage your student loan debt, and to repay your loan, stay in touch with your lender, financial aid office or ISAC.  Also, read any mail you receive regarding your loan, keep records in a safe place, and stay current with your payments.  Be sure to write your loan account number on your checks and all correspondence with your lender, and maintain records of all electronic payments.

If you are unable to make your monthly payments, contact your lender immediately to avoid default by considering alternative repayment options. Additionally, depending upon your circumstances, you may qualify for loan deferment, forbearance or forgiveness. Because most student loans are not dischargeable under bankruptcy, contact the holder of your loan to discuss repayment options if you are considering filing or have filed for bankruptcy protection.

If your loan does default, there are repayment and other default resolution options.  If you have defaulted loans with more than one guaranty agency, resolution will need to be pursued with each agency.  Once a loan defaults, record of the default will remain on your credit report for seven years after the loan has been paid in full.

Identify Your Loan Holder

If ISAC holds your defaulted student loan(s), contact the Debt Management Department to find out the steps you can take to resolve your default situation.  If you are unsure who holds your loan(s) and need help identifying your lender, servicer, and/or guarantor, use the National Student Loan Data System Student Access area to retrieve your loan information.

Repayment Options for Defaulted Loans:

Repayment Schedule

You may qualify for a repayment schedule based on your current financial situation. To establish an approved repayment schedule, you will need to contact the holder of your loan.  It is important for you to communicate complete information regarding your financial circumstances in order to qualify for a repayment schedule.

Default Resolution Options to Regain Federal and State Student Aid Eligibility:

Payment in Full

You can pay off your account in full. Contact the holder of your loan to obtain your correct payoff balance and receive instructions on how to remit your payment.

The benefits to repaying your loan in full include:

• credit bureau records are updated to indicate the loan is paid
• federal and state student financial aid eligibility is regained
• tax refunds will not be  withheld
• interest and collection costs are saved.

Federal Loan Rehabilitation

The default status may be removed from your credit bureau report through participation in the Federal Loan Rehabilitation program. To be eligible, your loan must not have a legal judgment against it, you must voluntarily make nine approved and on-time payments within a consecutive ten-month period, and sign a Rehabilitation Agreement. Each of the nine payments must be made within 20 days of the due date. You may not pay a lump sum to qualify for loan rehabilitation. However, you may start over if you are unable to fully meet these requirements within a consecutive ten-month period.        

Approximately 60 days after the qualifying payments have been made, and the signed Rehabilitation Agreement has been received, your loan will be repurchased by a participating lender to whom you will send all subsequent payments. The most important benefit for you is that the default status on your credit bureau report will be removed. (If you are currently under administrative wage garnishment, ISAC administers a separate program which will allow you to rehabilitate your loans; contact ISAC’s Debt Management Department for details.)

Please contact the holder of your loan to receive additional information about Federal Loan Rehabilitation. 

In addition to the removal of the default status on your loan, other benefits to rehabilitating your loan include:

• loan is removed from active collection status
• federal and state student aid eligibility is regained
• deferment and forbearance eligibility is regained (if borrower meets eligibility requirements and lender approves request)
• collection costs are reduced.

In most instances, a borrower is eligible for loan rehabilitation only once per loan.

Reinstatement of Federal and State Student Aid Eligibility

If you have a defaulted student loan, you are not eligible to receive additional federal or state student aid funds (student loans or grants). You do, however, have a one-time opportunity to reinstate your eligibility by voluntarily making six approved, consecutive and on-time monthly payments. You will need to submit a request (in writing or by telephone) to have your eligibility reinstated. It is important to remember that this is a one-time opportunity, and you may not miss a payment or be late on any of the six agreed upon payments. You may not pay in a lump sum, or restart your repayment if you should miss a payment or if a payment is late. 

After eligibility is reinstated, you must continue to make payments on your defaulted loan(s) even while in college.  If you fail to continue to make monthly on-time payments, you will no longer be eligible for federal and state financial aid programs, including student loans, until your loan(s) are removed from default.  Contact the holder of your loan for more information about reinstatement of federal and state aid eligibility.

Loan Consolidation

You can request that your defaulted student loans be consolidated to remove them from a defaulted status. All eligible loans will be consolidated into a single, more manageable loan, with an extended repayment period. Contact the holder of your loan for information about consolidating your loans(s) and to determine if consolidation is the right option for you. 

Some of the benefits of loan consolidation include:

• loan is reported as paid in full through consolidation to credit bureaus
• federal and state student aid eligibility is regained 
• deferment and forbearance eligibility is regained (if borrower meets eligibility requirements and lender approves request)

Frequently Asked Questions (FAQ’s)