Can I Qualify for Financial Aid if I Have Defaulted?
Defaulting on a student loan, i.e. not making payments for a certain length of time, can have serious consequences on your ability to take out additional credit in the future. In addition to credit cards, car loans and mortgages, this will also include additional federal student aid. However, there are a variety of methods that you can use in order to remove the default and begin receiving student aid once more.
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Defaulting on a Student Loan
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A default on a federal student loan typically occurs 270 to 360 days without making any payments. Of course, you can make arrangements with your loan provider, which may include forbearance or deferment, during this time. Such arrangements do not count towards a student loan default. Student loan defaults cannot be discharged through bankruptcy.
Consequences of Student Loan Default
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Defaulted student loans may be turned over to a collection agency, and you will be liable for any costs associated with this, including court fees. Up to 15 percent of your disposable pay may be garnished, any income tax refunds may be taken and social security payments may be withheld. Any loans in default, after being paid, will remain on your credit history for up to seven years, which in turn may limit your ability to take out other forms of credit such as mortgages, credit cards or auto loans. It is possible that any professional licenses you may hold cannot be renewed.
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Qualifying for Financial Aid
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Another consequence of defaulting on a federal student loan is that you will no longer be eligible for further amounts of student aid. However, this only applies while you are in default. If you manage to repay or satisfy the defaulted loan in full, your eligibility for further financial aid will be restored. Alternatively, you can approach the U.S. Department of Education to make a deal to receive additional student aid. You will be required to make six consecutive monthly payments on your defaulted loan, at a sum that is agreed upon beforehand. After this period, you may apply for further student aid. You must continue to make payments regularly, or this agreement will be terminated.
Student Loan Rehabilitation
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Student loan rehabilitation is a program designed to help those in default get back on their feet. For those who have taken out loans under the Federal Family Education Loan (FFEL) program, nine payments, at an agreed amount, must be made within 20 days of their due dates. Any wage garnishment as a result of student loan default does not count towards this payment. After these nine months, the loan may be purchased from a bank, at which point you will continue to make payments under their new terms. Your default will be removed from your credit score, and you will be able to take out further student loans in the future. Similar terms exist for direct loan and Perkins loan borrowers.
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References
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