University of New Hampshire

School of Law

Avoiding Default

Defaulting on a loan should be avoided at all costs.  If you are unable to make student loan payments, contact your lender immediately to discuss deferment or forbearance options.  Keep in mind that once you default on your loans, you are no longer eligible for deferments and forbearances, your credit will be affected adversely and you will incur the costs of delinquent collections procedures and possibly litigation.  The following is a brief description of deferment, forbearance and rehabilitation options:

Deferment

During deferment, the lender allows you to postpone repaying the principal of your loan for a specific period of time. Most federal loan programs allow students to defer their loans while they are in school at least half time.

For Federal Perkins Loans and Federal Subsidized Stafford Loans, no interest accrues during the deferment period because the federal government pays the interest. For other loan programs, such as the unsubsidized Stafford loan, the interest still accrues during the deferment period. Students can postpone the interest payments on such loans by capitalizing the interest, which increases the size of the loan.

Capitalizing the interest adds it to the loan principle. This increases the amount of the debt, which means you'll be paying interest on interest, in addition to interest on the principle.

Deferments are not granted automatically.  You must submit an application and provide documentation to support your request for a deferment. Do not stop making payments on your student loans until after you are notified that your deferment has been granted.

Forbearance

During forbearance, the lender allows you to postpone or reduce your payments, but the interest charges continue to accrue. The federal government does not pay the interest charges on the loan during the forbearance period, interest will still accrue during the period.

Note also that there are limits on the length of forbearance. Forbearances are typically granted in 12-month intervals for up to three years.

Forbearances are not granted automatically. You must submit an application and provide documentation to support your request for a deferment. Forbearances are granted at the lender's discretion, usually in cases of extreme financial hardship or other unusual circumstances when the borrower does not qualify for a deferment.

Do not stop making payments on your student loans until after you are notified that your forbearance has been granted.

Rehabilitation

If you defaulted on your federal education loans, but are now able to begin making payments on the loans, you may be able to rehabilitate the loans.  This can remove the default from your credit history and let you regain eligibility for additional federal student aid.

You must make arrangements with the current holder of the loan to repay the loan. After you have made six full and voluntary on-time payments over the course of six months, you will regain eligibility for federal student aid.

After you have made 9 of 10 consecutive payments within 20 days of the due date, you can apply to have the loan rehabilitated.

If the guarantee agency is able to sell the loan to a lender, the loan will be considered rehabilitated and the default will be removed from your credit history. (Rehabilitation is also available for Federal Perkins loans and loans.)

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