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Managing Default

Most federal loans enter default when payments are more than 270 days past due. Other loan types may default earlier.

Having a loan default can seem scary, especially considering the consequences. Realizing how you reached this point is important—as is knowing what you can do now to manage the situation.

 

ASA’s Role In Your Loan

American Student Assistance® (ASA)  may own your loan if it has defaulted. Our role is to help you reverse default’s negative effects—and to remind you that you can recover from default.

We know default can be overwhelming. Rely on us for accurate, timely, and credible information and support.

At ASA®, we believe all borrowers deserve someone on their side. As a student loan guarantor, we are always here to benefit you.

  • From application through repayment, you and your family can expect neutral, honest federal student loan solutions from ASA.
  • As a nonprofit working with the U.S. Department of Education, our focus is not on selling you anything.
  • Our focus is on your financial wellness, and it always will be.
  • If your loan has defaulted—or if you are worried that it might—contact us. No matter your situation, we can customize a solution for you.

If ASA Holds Your Loan

In our role as guarantor, ASA holds a number of defaulted FFELP loans, and assigns collection agencies to collect on them. If this has happened with your loan, you should pay the collection agency directly. If you are not sure who that is, you can call us at 800.343.2120 to ask. If you are not sure whether ASA holds your loan, check at nslds.ed.gov.

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Default Consequences

Most federal loans enter default when payments are more than 270 days past due. Other loan types may default earlier.

If you are struggling with your loans, you may think 270 days sounds like a long time. Just remember that the consequences of default can impact you even longer.

Student loan default can mean:

  • Your entire loan balance will be due in full, immediately.
  • Collection costs can be added to your outstanding balance under certain circumstances.
  • Up to 15% of your paychecks can be taken.
  • Your Social Security, disability income, and government payment streams such as federal tax refunds can be seized. 
  • You will lose eligibility for federal aid, including Pell grants.
  • You will lose deferment or forbearance options.
  • Outstanding fees and unpaid interest can be capitalized (added) onto your principal balance.

Impact on Your Credit

If you do not establish and maintain an adequate payment plan within 60 days of the notice of default, the default record will be reported to national credit reporting agencies. A defaulted student loan is also one of the worst entries that can appear on a credit report. A default entry is far worse than late payments. It can mean that:

  • You may be denied credit cards, car or home loans, or apartment leases.
  • Your interest rate may rise on existing loans and credit cards.
  • Banks may refuse to allow you to open a checking account.
  • You may have to pay more for car or home insurance.
  • You may be unable to obtain or renew a professional license.
  • You may be denied a job due to poor credit.

Government Payment Offset (Garnishment)

The Treasury Offset Program (TOP) allows the U.S. Department of Treasury to offset, or garnish, government payment streams to pay your defaulted student loan debt. If you are a Federal Family Education Loan Program (FFELP) borrower, these payment streams may be offset by the U.S. Department of Education (ED) on behalf of your guarantor. 

In other words, the Treasury can take money from your tax refunds or other government checks and use it to pay back your student loans. Different kinds of government payment streams can be garnished. These may include, but are not limited to:

  • Federal travel reimbursements.
  • Payments from other government agencies (such as Social Security).
  • Federal tax refunds.
  • State tax refunds.

If you have defaulted on a federal student loan, up to 100% of your tax refunds can be seized. Other government payment streams can also be offset in various amounts.

Government payment streams are offset without your permission. However, you will receive information regarding the amount and date of your offset.

Will My Tax Refunds or Other Government Payment Streams Be Seized?

Federal law requires your guarantor or ED to send you proper notice before an offset occurs. This notice will say that a claim has been filed against your defaulted loan to ED and will also provide information on:

  • Your defaulted loan.
  • Your rights as a student loan borrower.
  • How you can avoid tax offset.
  • How to request documentation about your defaulted loan.
  • How you can request a hearing to object your offset.

You are able to challenge your tax offset. However, you cannot challenge it simply because you did not receive a notice from your guarantor or ED. If you think an offset was made in error, contact your loan holder directly.

You may be able to avoid having your government income streams such as tax refunds seized if you set up a satisfactory repayment arrangement and begin making payments. Note that you can still be subject to offset even if your wages are currently being garnished.

Contact your guarantor (if your loan is a FFELP loan) or ED (if your loan is a Direct Loan) if you have questions about this process or would like to know your options for recovering from default. If you don’t know whom to contact, you can find out who currently holds your loan by using the National Student Loan Data System (NSLDS). This is ED’s database for all federal student loans.

You can read more about offset from Federal Student Aid.

If you have been notified that your federal tax refund will be garnished and you have an ASA held loan, you can contact us at 800.343.2120 with questions or concerns.

Why Are Collection Costs Being Charged?

Pursuant to the Higher Education Act of 1965, as amended, as well as most federal student loan promissory notes, collection costs must be assessed on defaulted federal student loans in most cases.  The amounts of these collection costs vary, depending on how the borrower chooses to resolve the defaulted loan and by the amounts permitted by federal law.  Defaulted loans held by American Student Assistance are currently charged the following collection costs:

  • 18% for general collection payments
  • 18.5% for defaults resolved via loan consolidation
  • 16% for defaults resolved via loan rehabilitation

These costs are in addition to your statutorily authorized interest rate.

Can I Avoid Collection Costs If The Loan Has Already Defaulted?

If one of the following actions occurs within 60 days of the initial notice of default, no collection costs will be assessed:

  • Loan is paid in full
  • The borrower initiates a satisfactory repayment arrangement during the 60 day period explained above, and continues to satisfy the agreement until the loan is no longer in default. Contact your loan holder for details on what constitutes initiating and completing a satisfactory repayment arrangement.
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Recovering From Default

There are serious consequences of default, but there are also ways to repair the situation - paying the loan in full, entering a rehabilitation program, or consolidating out of default.

The benefits of completing these options include:

  • You can regain eligibility for additional financial aid.
  • Your wages and tax refunds will not be garnished.
  • Your loan will no longer be due in full.
  • You can regain access to unused deferment and forbearance time.
  • If you start within 60 days of your notice of default, you can avoid collection costs and a default line on your credit report.

Payment in Full

Paying the total amount you owe—the loan plus any accrued interest and penalty fees—is the fastest way out of default.

  • Paying in full may not make sense for you, but try to pay as much as you can right away.
  • Collection costs of up to 25% are applied to your loan balance 120 days after your loan defaults, so decreasing your balance can help decrease these costs.

Loan Rehabilitation

To rehabilitate your loans, you need to make nine on-time monthly payments to your loan holder within a 10-month period. You and the loan holder (or the collection agency working with the loan holder) will agree on a reasonable and affordable payment amount. You can use our calculator to estimate your payment amount.

Remember, all nine payments must be on-time (within 20 days of the due date) and voluntary in order to count towards rehabilitation. If your wages are being garnished, you will have to make these voluntary payments in addition to the garnishment. Once you make the first five payments under the rehabilitation program, the garnishment order will be suspended. You may only receive the benefit of this suspension once so it’s important to keep making those rehabilitation payments on time.

Loans rehabilitated on or after August 14th, 2008 only receive the rehabilitation opportunity once, so it’s important to have a good plan in place for once your loan is out of default.

Entering into a loan rehabilitation program promptly following default may help you avoid collection costs and the default being reported to national credit reporting agencies.

What you will pay during rehabilitation: You will have to provide your loan holder with your income information as well as the number of people in your family. Your payment will be initially calculated as 15% of your disposable income (which is your Adjusted Gross Income minus 150% of the poverty level for your family size). You can get an estimate with our rehabilitation payment calculator. Just remember that you’ll be required to provide proof of your income if this initial payment amount is one you can afford.

Calculator results are only estimates. Your eligibility and actual payment amounts may vary. Contact your loan holder for more information.

If you can’t afford that amount, your loan holder will ask for more information about your expenses via this federal form in order to paint a more accurate picture of your total financial circumstances. This often, but not always, results in a lower payment amount. You will then be able to choose between the 15% formula amount and the amount based on the more detailed information. If neither payment amount is acceptable to you, you may not be able to participate in the rehabilitation program.

What happens after rehabilitation: Once you have agreed upon a payment amount and made all the required payments, your loan holder will attempt to have your loan purchased by a rehabilitation lender. If your loan is purchased by a rehabilitation lender, your loan will be rehabilitated and no longer in default. A loan servicer on behalf of the rehabilitation lender will contact you following the rehabilitation sale. All future payments will be sent to this new loan servicer so make sure you have their payment address and contact information. You’ll also need to work with them to develop a new payment plan that will allow you to keep your loan in good standing. Remember that rehabilitated loans are eligible for lower payment options such as income-based repayment, extended repayment and others.

Not only will rehabilitation get your loans back on track, but it may also help your credit and lower any collection costs that were assessed against you. And, if you are going back to school, you typically become eligible for additional financial aid once you’re six payments into the rehabilitation process.

To get started, contact your loan holder, which will be either your guarantor or the Department of Education. You can find out who this is on the National Student Loan Data System (NSLDS).

If you begin rehabilitation within 60 days of default, collection costs will not be charged and your default will not be reported to national credit reporting agencies. Otherwise, on loans held by ASA, collection costs of up to 16% of the total unpaid amount, including interest, will be added to your balance upon successful completion of rehabilitation.

Advantage: Once your loans are rehabilitated, the default will be removed from your credit history (though the delinquency will stay).

Disadvantage: Time. This takes a minimum of 9 months. If you are looking to go back to school soon and need financial aid, this could delay your educational goals. (Some borrowers may be eligible to regain aid eligibility prior to fully completing the rehabilitation process. Contact your loan holder to see if you qualify.)

Consolidation

Consolidating out of default can give you more time to repay your loan. But, before choosing this option, be aware of its potential disadvantages too.

To consolidate out of default, you must do one of the following:

  • Establish a satisfactory repayment arrangement with your current loan holder and maintain it until your loan has successfully consolidated.
  • Agree to repay the Consolidation loan under an income-based, income-contingent (Direct Consolidation loan), or income-sensitive (Federal Family Education Loan Program Consolidation loan) repayment plan.

Cost: If you establish and maintain a satisfactory payment plan within 60 days of default, collection costs will not be charged and your default will not be reported to national credit reporting agencies. Otherwise, the collection cost charge will be up to 18.5% of your total balance upon successful consolidation of your loan.

Advantage: Time. This can be done faster than rehabilitation.

Disadvantage: Consolidation does not remove the default from your credit report (if it has already been reported) and can cost you more money over the lifetime of your loan. Even if the default has been reported, however, your record will also show that the default has been resolved and that the loan is now in good standing.

Going Back to School?

Even if you’re in default, you may be able to get additional financial aid if you make 6 consecutive, reasonable, and affordable payments on your loan. Contact ASA® to find out more.

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