Student Loans and Default
© 2000 by Neighborhood Legal Services, Inc.
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    You are in default on your student loans when you do not make payments on your loan for at least 270 days and your lender concludes that you will not be making any more payments. Chances are if you have not paid your loan in several years, you are in default on your student loans.

    Being in default has many negative consequences. These can include:

• denial of new loans
• bad credit reports
• possible wage garnishment (up to 10 % of your income)
• extra fees and interest that are added to the original loan amount
• seizure of tax refunds, and
• refusal by your school to release transcripts
  
  Is there anything that I can do once I am in default?

    Yes, there are several things that you can do to get yourself out of default. You can:

• "consolidate" your loans, or
• "renew your eligibility" for new loans, or
• "rehabilitate" your defaulted loans
  

    Remember, you must apply in order for any of these things to happen. See the sections below for telephone numbers.

    Yes. If you are interested in going back to school, you can get new loans even though you are in default, but you have to work on your default status before you can get new loans. This is called "renewing your eligibility" for student loans.

    First, you should call your lender and make a repayment arrangement. Make sure you ask for a "reasonable and affordable payment plan." You have a legal right to a reasonable and affordable repayment plan. These payments can be for as little as $5 a month depending on your income. If you want this type of plan, you have to tell the lender that you want a "reasonable and affordable payment plan." These are like magic words - once you say them you should be offered the repayment plan.

    In New York, these programs are called the Renewed Eligibility for Financial Aid Programs (REFA) and (RETA). You can find out more about them by calling 1-800-642-6234.

    Once you have made a reasonable payment plan with your lender, you must keep up with the payments. This is a one-time chance. If you do not make your payments, you will not get a second chance at a low repayment plan.

    After you make 6 consecutive monthly payments, you will "reestablish your eligibility" and you will be able to get new student loans and grants.

Now that I have a payment plan, am I still considered to be in default?

    Yes. But once you are on a payment plan and have made 12 consecutive payments, you can request a loan rehabilitation. Rehabilitation means that your loan will be taken out of default status, and your credit report will no longer show the default. You will again be eligible for deferrals and forbearance. You will automatically be placed on a 10-year repayment schedule.

    For more information on rehabilitation call 1-800-666-0991.

    Yes, this is another option (other than renewed eligibility or rehabilitation). Consolidation is the process of combining some, or all, of your student loans into one loan with one interest rate and one monthly payment.

    Even if you are in default on your student loans, you are eligible for loan consolidation. First, you have to contact a consolidating lender, such as Federal Direct Consolidation Loan Program at 1-800-557-7392 and make a payment plan. After you have done this, you also have to contact the Consolidation Unit at New York State Higher Education Services Corporation (NYSHESC) to request a consolidation. Contact them at 1-800-666-0991. Note that consolidation charges fees and/or costs.

What are the advantages of loan consolidation?

    There are several benefits to loan consolidation. Once you consolidate you will be out of default (even though lateness will show on your credit reports), you can get income sensitive repayment plans, you will be eligible for deferments and forbearance, you will no longer get collection calls, and you will be eligible for new loans.

    If your loan has gone into default with the NYSHESC anytime after July 1992, you are entitled to an administrative review. This means that if you think that your loan was placed into default by error - such as if there was a delay in processing a deferment request, you are entitled to a review of your case. During the review you must be given the option to enter into payment agreement and your default will not be reported to a credit bureau. You will have access to your files and the chance to review your case. HESC will notify you on their decision.

    If you would like to request a review, call HESC's Bureau of Collection Control, Appeals Unit, at 1-800-666-0991.

What if the agency never contacted me about my loan and now I am in default? Am I still obligated to pay?

    Yes, even though you were not contacted, you are still obligated to pay. The agency believes that notices are only sent to you as a convenience. If your address changes, or you have never received a payment notice, contact your loan agency immediately.

    Your loan is due on the same date each month. Keep track of this date and make your payments by this date even if you don't have a payment coupon.

    For more information about defaulted student loans, contact your lender or our office at 847-0650.

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