EnterChapterTitle: Federal Family Education Loan Program
SectionTitle: Delinquency and Default
Most borrowers repay their loans on time, but some do fall behind on
their payments for a variety of reasons. A financial aid administrator
should advise a student to maintain contact with the lender or loan
servicer to avoid delinquency and default if the borrower has
When a scheduled payment on a Federal Stafford Loan, Federal
Supplemental Loans for Students (SLS) loan, or Federal PLUS Loan
is not made on time, the loan becomes delinquent. To prevent
defaults, a lender is required to repeatedly attempt to contact a
delinquent borrower by phone and mail, to use skip-tracing
techniques to locate the borrower if his or her whereabouts become
unknown, and to request the guaranty agency's assistance to resolve
repayment problems. If a borrower is late in making a payment, the
lender may require the borrower to pay a late charge. The borrower
may also be required to pay collection costs, such as attorney's fees
and court costs, if required in the borrower's promissory note.
For loans that enter delinquency on or after April 7, 1986, default
occurs when a loan repayable in monthly installments becomes 180
days delinquent. For a loan repayable in less frequent installments,
default occurs when the loan becomes 240 days delinquent.
CONSEQUENCES OF DEFAULT
If the borrower's delinquency persists, the lender must accelerate the
loan; that is, the lender must demand--using a "final demand" letter--
the entire balance of the loan in one payment. The lender must also
file a default claim with the guaranty agency on a seriously
delinquent account that is more than 180 days delinquent (or 240
days delinquent for a loan repayable in installments less frequent
than monthly). The guaranty agency reviews the lender's collection
efforts before paying the lender's default claim. If the guaranty
agency pays the default claim, the agency must continue collection
efforts. Before reporting the default to a national credit bureau or
assessing collection costs, the guaranty agency will provide the
- a written notice of its proposed actions,
- an opportunity to enter into a repayment agreement, and
- an opportunity for an administrative review of the status of the
[[Credit bureau notification]]
Once a guaranty agency notifies a credit bureau of a borrower's
default, the credit bureau may provide inquirers with that
information for up to seven years from the date the loan is first
reported as a default; for up to seven years from the date the guaranty
agency pays the default claim; or, for a borrower who enters
repayment after default and again allows the loan to default, up to
seven years from the date the loan enters default the second time.
[[Required loan collection efforts--34 CFR 682.411]]
Collection efforts by the guaranty agency include a series of letters
and phone calls to persuade the borrower to enter repayment on the
defaulted loan and may also include mandatory assessment of
collection costs, garnishing up to 10% of the defaulter's disposable
pay, withholding ("offsetting") part or all of a defaulter's federal
and/or state income tax refund, and filing suit against the borrower.
A guaranty agency must provide counseling and consumer
information to a borrower by the 10th working day after the agency
receives a request from the lender for preclaims assistance (preclaims
assistance is the collection assistance the guarantor makes available
to the lender no later than the 90th day of delinquency). As part of
the counseling, the guaranty agency must inform the borrower of
preventive measures to avoid default, such as income-sensitive or
graduated repayment, deferment, forbearance, and consolidation of
delinquent loans under the FFEL Program or the Federal Direct
Consolidation Loan Program.
[[Limit on collection costs when defaulted loan is
consolidated--34 CFR 682.401]]
A guaranty agency may add collection costs in an amount not to
exceed 18.5% of the outstanding principal and interest to a defaulted
FFEL that is included in a Federal Consolidation Loan or Direct
A guaranty agency must initiate wage garnishment action not later
than 225 days after it pays a default claim. If the borrower has
insufficient income to garnish but does have assets from which the
debt can be satisfied, the borrower's loan account must be assigned to
the U.S. Department of Education for litigation.
All guaranty agency wage garnishments must be performed in
accordance with the procedures described in Section 488A of the
Higher Education Act of 1965 (HEA), as amended, 34 CFR
682.410(b)(10), and specific guidance the Department has issued. If
the defaulter is sued, wage garnishment may be included in the
court's ruling. The Higher Education Technical Amendments of 1991
(P.L. 102-26) provided for continuation of garnishment, offset
action, or a lawsuit regardless of any federal or state statutes of
limitation that might otherwise have applied to such collection
efforts. The Higher Education Amendments of 1992 permanently
abolished statutes of limitation that might otherwise have applied.
The abolition applies to all pending cases and outstanding debts, as
well as to current cases.
[[Ineligibility for additional SFA funds]]
A student with a defaulted loan is rendered ineligible for all Student
Financial Assistance (SFA) funds at the time the default occurs (that
is, once the loan reaches 180 days of delinquency for loans repayable
monthly and 240 days for loans repayable less frequently). Even if a
defaulted borrower's debt has been determined to be totally
uncollectible and was closed out (written off) with the principal
amount being reported to the Internal Revenue Service as taxable
income, the borrower is still considered to be in default and is
ineligible for federal student aid.
If a borrower who is in default on an SFA loan held by the
Department or by a guaranty agency applies for federal student aid,
the resulting Student Aid Report (SAR) will indicate that the
borrower is in default and, thus, not eligible for aid under the SFA
[[Ineligibility for deferment]]
Once a guaranty agency pays a lender's default claim, the borrower is
ineligible for any type of deferment on the loan, and he or she will
not be able to receive any federal financial aid until the obligation is
discharged or until the borrower has made satisfactory payment
arrangements with the lender or guarantor. A lender or guarantor
may grant forbearance to a borrower whose loan is delinquent or in
default. As noted above, even after a borrower makes satisfactory
repayment arrangements to repay the defaulted loan in order to
regain eligibility for SFA funds, the borrower must continue to make
scheduled payments on the defaulted loan. If the borrower is unable
to do so while attending school, he or she should request forbearance
on the loan.
If, after a borrower has defaulted, he or she receives a loan discharge
under the bankruptcy, total and permanent disability, closed school,
or false certification discharge provision, the loan is no longer
considered to be in default, and the borrower is eligible for further
federal student aid.
REINSTATEMENT OF ELIGIBILITY AFTER DEFAULT
If a borrower and guaranty agency reach a compromise agreement to
settle the debt for less than the total amount due, the borrower may
be eligible for additional federal student aid once the compromised
amount of the debt is paid. If the borrower chooses to reaffirm his or
her defaulted loan obligation and makes satisfactory payment
arrangements to repay the debt (six on-time, reasonable, and
affordable consecutive voluntary monthly payments), he or she may
regain eligibility for SFA funds. A student who resolves a default by
consolidating a defaulted FFEL also regains eligibility once the
defaulted loan has been paid in full by the Consolidation Loan or
Direct Consolidation Loan. See Section 8 of this chapter for more
information on consolidating defaulted FFELs.
A guaranty agency must inform a defaulted borrower who has made
six payments as described above of the possibility of loan
rehabilitation (after the borrower makes six more payments).
Reinstatement of eligibility does not bring a loan out of default, and
the borrower is not eligible for deferment.
If a student regains eligibility during an enrollment period (if the
sixth payment under a satisfactory repayment arrangement is made
after the start of an enrollment period, for example), the student
regains eligibility for the entire academic year in which he or she
regained eligibility status.
If a borrower has made satisfactory repayment arrangements to repay
a defaulted loan, his or her SAR will indicate that the borrower is
eligible but will include a warning that if scheduled payments are not
made on the loan, future federal student aid will be denied. The
financial aid administrator may reconcile the SAR with official
paperwork from the lender stating that the default has been satisfied.
This documentation must be kept in the student's file. The financial
aid administrator may then determine the student's eligibility for a
Loan rehabilitation is available to a borrower who has defaulted on a
FFEL and who meets certain conditions. The law requires a guaranty
agency to provide a loan rehabilitation program that will allow a
defaulter the opportunity to make 12 "reasonable and affordable"
consecutive monthly payments on a defaulted FFEL. The
Department expects each guaranty agency to determine what
constitutes a reasonable and affordable payment amount on a case-
by-case basis, after examining the borrower's financial information.
When establishing a reasonable and affordable payment amount, a
guarantor may not require a set minimum monthly payment amount.
A guarantor is required to document its determination of the
appropriate payment amount only if the payment is less than $50.
Each borrower must receive a written statement specifying what the
reasonable and affordable payment amount is as determined by the
agency and must be granted an opportunity to object to the terms.
After a borrower makes 12 consecutive monthly payments (which
may include the six consecutive monthly payments necessary to
regain SFA eligibility) on the defaulted loan, the guaranty agency (or
the Department, if the Department is holding the loan) will decide if
the borrower is a good candidate for loan rehabilitation. If so, the
loan holder will try to sell the loan to an eligible FFEL lender. A
borrower who has made more than 12 consecutive monthly payments
at the time he or she requests rehabilitation is immediately eligible
for consideration, if those payments were determined to be
reasonable and affordable and if they were made on time. Payments
secured from a borrower on an involuntary basis, through means
such as wage garnishment, cannot be counted towards the borrower's
required 12 consecutive monthly payments.
Once eligible for rehabilitation, the debtor must continue to make
payments while the guaranty agency transfers the loan to a lender.
Because of loan processing procedures, the borrower may have to
submit more than 12 payments before the loan is rehabilitated.
Once a loan is rehabilitated, the borrower regains eligibility for any
remaining deferment benefits. For example, if a borrower who has a
loan that is eligible for up to three years of unemployment deferment
receives two years of this deferment, later defaults, then rehabilitates
the loan, he or she is eligible for one more year (not another full
three) of unemployment deferment after rehabilitation.
The holder of the rehabilitated loan must promptly notify at least one
credit bureau of the loan's rehabilitated status. The notification of
credit bureaus is an important benefit to borrowers, because the
borrower's record of default is removed from his or her credit
history. A borrower with questions about loan rehabilitation should
contact the agency holding the defaulted loan.
A borrower who wishes to rehabilitate or consolidate a loan on
which a court judgment has been secured must sign a new
promissory note prior to the sale of the loan to an eligible lender.
(The Department has previously provided guidance stating that a
guaranty agency may not exclude borrowers with judgment accounts
from consolidating their defaulted loans.) Because a judgment is not
always repaid under the original terms and conditions of the FFEL
promissory note, the judgment is not viewed as an eligible FFEL.
Therefore, rehabilitation or consolidation of a loan on which a court
judgment has been secured requires the guaranty agency to vacate
the judgment and to convert the judgment debt into an eligible FFEL.
This conversion takes place when the borrower makes a new promise
to repay the debt by signing a FFEL promissory note on the amount
due on the judgment.