Preventing Default

What is default?

Default is a legal term used when a borrower fails to repay a loan according to the terms of the signed promissory note. For a Federal Direct Student or Parent Loan, default occurs when the borrower fails to make a payment for 270 days under the normal repayment plan, and has not requested deferment of payment according to the Department of Education's standards.

Why does default matter?

Defaulting on a loan affects not only the borrower, but also the college or university as well as the US taxpayer. The borrower will experience negative consequences to his or her credit rating, garnishment of wages and collection from federal funds such as tax refunds or and even Social Security benefits.

If many borrowers at a particular college or university go into default status, the institution can lose the ability to participate in federal student aid programs, thus denying future students the ability to receive financial aid to help pay for college.

When borrowers default, the US government eventually must write off the loss, and thus passes the losses on to the taxpayer, either in the form of higher taxes, higher deficits, or the loss of other programs and benefits that the funds might have been used for instead.

How can you keep from defaulting on your educational loans?

There are many steps you can take to prevent default.

  • Plan wisely - borrow only what you need each semester. Don't take the maximum loan amounts unless you really need them.
  • Know your earning power. Research starting salaries in your chosen field and regulate your borrowing accordingly. If you might earn $20,000 in your first year of employment, you're at risk of default if you leave school owing twice that amount.
  • Keep records of your total debt and use a repayment calculator to keep track of what your monthly payment will be. Do this every semester once you have accepted your loans so you won't be taken by surprise.
  • Plan to graduate in a timely fashion. Adding another year of study can add significantly to your debt at graduation. Meet with your academic advisor every semester to plan for efficient progress toward graduation.
  • Contact your lender(s) if you are having problems making your payments. You might qualify for a forbearance, which allows you to stop making payments for a time period while keeping your loans in good standing.