The Student Loan Process and What Happens if You Can't Pay

The Student Loan Process and What Happens if You Can't Pay
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Last updated: July 2013

If you took out one or more loans while going to a community college, university, trade school, vocational school, or other post-high school education, you have probably been contacted about paying your loans back. This information will explain the student loan process, who can collect on your student loans, what options you have and how you can get information about your loans.   

What is a student loan?

A student loan is money that you borrow to pay for college or career school. You can get a student loan from the federal government or a private source like like a bank, credit union, or other financial institution. Depending on the terms of your loan, you may get the loan check or it may be sent right to your school. You don’t have to begin repaying your loan until you leave school or drop below part-time. 

Who is involved in the student loan process?

You might think that the only groups interested in your student loans are you, your school and your lender. Most student loans, however, are set up between the United States Department of Education, certain "guaranty agencies", you, your school and your lender. It is important for you to know who these other parties are, why they are involved and why they might be contacting you.

What is the role of the United States Department of Education?

Most student loans are guaranteed or subsidized by the federal government. These loans are sometimes called FFELs (Federal Family Education Loans), GSLs (Guaranteed Student Loans), Stafford loans, Perkins Loans or PLUS Loans. "Guaranteed" or "subsidized" means that while you are in school, the United States Department of Education pays the interest on your loan. When you leave school and start to pay the loan back yourself, the United States Department of Education still pays part of the interest. This lets you pay a low interest rate.

What is the role of a guaranty agency?

In most states, a guaranty agency will act as a middle-man between the lender and the United States Department of Education. Each state has its own state guaranty agency. In Illinois it is called the Illinois Student Assistance Commission (ISAC). But there are many private, non-profit, guaranty agencies like USA Funds (USAF) and the Higher Education Assistance Foundation (HEAF).

What other agencies may be involved in collecting my student loans?

Sometimes you will get a notice from a company, agency, or lender who is not the lender who gave you your loans. If you do get a notice, it is probably because your student loans have been "sold" or "transferred for collection". It is important to understand the difference between the two.

Selling your Loan:

Often the original lender (the place which gave you your loan) will sell your loan to another lender who only deals with student loans, such as The Student Loan Marketing Association (SLMA). The Student Loan Marketing Association is also known as Sallie Mae or The Loan Servicing Center. So, if you have some notices from SLMA, and others from The Loan Servicing Center, you should know that they are all from the same company.

Note: No matter who your loan is sold to, all you need to do is send your payments and any questions to the new lender.

Transferring your Loan for Collection:

At any time, the original or new lender can hire another company called a "servicing company" to try to collect payments on your loans. These servicing companies are like collection agencies because they will ask you to send them payments, which they will send to the lender. This can be confusing because if you try to send money to the lender after your loans have been transferred, they will tell you to send it to the servicing company. If this happens, just send the money to the servicing company. Be sure to write your account or loan number on the check or money order so your payment will go to your account. Then call the lender to make sure that they got the payment that you sent to the servicing company. 

What can I do if I can't pay my student loans after I leave school?


If you are not making loan payments, your account may be reported to credit reporting agencies as “delinquent.” This means that you are behind on your student loan payments.


If you have not paid on your loans for 9 months, your student loan will go from being delinquent to being in “default.” You may be granted deferment in the 9 months before you default on your loan. After that, your only option will be forbearance. (Deferment and forbearance are described below.)

If you have a subsidized loan, you have 6 months before you have to begin making payments. This is called a "grace period". This 6 month period starts when you leave school, whether you graduate or quit. After that, if you cannot pay your student loan, you have 2 options: deferment or forbearance. To apply for either option you must contact your lender.


A "deferment" is when your lender agrees to let you stop making payments on your loan for a short time, without adding interest during this period. Here is a list of some possible deferments:

  • You are actively looking for a full-time job but have not been able to find one;
  • You are a student going to school at least one-half time;
  • You are on active duty status in the Armed Forces; 
  • You are receiving federal or state public assistance benefits such as SSI or food stamps;
  • You are working full time but earning no more than the greater of: a) the federal minimum wage; or b) 150% of the federal poverty level;
  • You are in a rehabilitation training program;
  • You have a temporary total disability; 
  • You are providing home care to disabled spouse; 
  • You are taking parental leave;
  • You are the mother of pre-school children starting work at minimum wage or $1 over.

Different types of student loans have different rules for deferment. The longest you can defer any loan is 3 years. During a deferment, the amount of your loans does not increase because interest is not added to the loans. Unlike the 6 month grace period after you stop attending school, deferment does not happen automatically. You have to apply for a deferment. Finally, you can only get a deferment if your loans are not in default.


A "forbearance" is when your lender reduces the amount of your payments or allows you to stop making payments for a short time. Forbearance is different from deferment because the interest will continue to add up on your loan while your payments are delayed or reduced. Forbearance is not automatic. You have to apply for forbearance just as you would for deferment.

If you have a federally subsidized loan and your monthly student loan payments add up to 20% or more of your income, your lender must give you a year-long forbearance. If you continue to experience financial hardship and provide documentation of financial hardship to your lender, this forbearance can be extended to 3 years.


“Rehabilitation” is when your loans are taken out of delinquency or default status. If your lender grants deferment or forbearance, then your loans are rehabilitated. During rehabilitation, you can consolidate your federally subsidized loans into a Direct Consolidation Loan (Direct Loan) or Special Direct Loan. 

Once you consolidate your loans into the Direct Loan program, you can make payments based on your income and the amount of your student loan debt as part of the Income Contingent Repayment plan. Another program known as the Income Based Repayment plan lets you make payments based on your income and family size. Under either repayment plan, your remaining student loan debt is discharged (forgiven) after 25 years.

If you have both government-held and privately-held subsidized loans you may qualify for the Special Direct Loan program. Borrowers who qualify for the Special Direct Loan program should receive application information from one of four federal servicers (FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet or Sallie Mae). If you learn that you qualify for a Special Direct Loan, do not consolidate into a  Direct Loan. A Direct Loan consolidation cannot be transformed into a Special Direct Loan and the interest rates on a Special Direct Loan will probably be better.

Income Based Repayment Plan

You may qualify for an income based repayment plan (IBR), which may lower your monthly payments. Only certain types of loans are eligible for IBR. Monthly payments are calculated based on your income and family size.  For more information and to see if you qualify, see the U.S. Department of Education's Income Based Repayment Plan.


Technically, student loans can be discharged in bankruptcy, but the law makes this very difficult. To get your student loans discharged, you must show that making payments creates an “undue hardship” on you and your family. This means that you are not to blame for your financial circumstances and you can’t afford to pay your living expenses while still making loan payments.

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