Student loan default takes place when a borrower is unable to make payments over a considerable period of time causing severe financial repercussions Defaulting on student loans may ruin credit scores cause wage garnishment and prevent future loans from being obtained Knowing how defaulting works and how to avoid it may keep borrowers on their repayment path
What Is Student Loan Default
A student loan becomes delinquent when a payment is overdue After some time of nonpayment the loan becomes default status which differs for different types of loans
Federal Student Loans
A federal loan becomes delinquent after a payment is missed and will stay delinquent until the payment is received
If payments are not made for ninety days then the delinquency is reported to credit bureaus which negatively impacts the borrower’s credit score
A federal student loan is in default after two hundred seventy days or around nine months of nonpayment
Private Student Loans
Default periods vary with the lender but the majority will consider a loan to be in default after ninety to one hundred twenty days of nonpayment
Private lenders provide fewer payment protections than federal loans rendering default even more damaging
Effects of Student Loan Default
1 Adverse Impact on Credit Score
Missed and defaulted payments considerably reduce credit scores making it challenging to qualify for credit cards auto loans and mortgages in the future
2 Wage Garnishment and Tax Refund Seizure
For federal student loans the government is able to garnish wages and seize tax refunds to pay off unpaid debt Private lenders can sue borrowers to obtain payment
3 Loss of Loan Benefits
Defaulting leads to losing federal loan privileges such as deferment forbearance and income driven repayment plans Borrowers also risk losing eligibility for future student aid
4 Higher Loan Balance
Late fees collection charges and accumulated interest can add up to make the total amount higher making it more difficult to pay back the debt
5 Legal Action by Private Lenders
Private lenders can take legal action against delinquent borrowers resulting in judgments in court and extra financial costs
Avoiding Student Loan Default
1 Pay on Time
Arranging automatic payments or reminders can make sure that payments are made on time
2 Look at Income Driven Repayment Plans
Federal loan borrowers facing difficulties in paying can join income driven repayment plans to reduce monthly payments based on income
3 Apply for Deferment or Forbearance
If facing financial difficulty borrowers may qualify for deferment or forbearance to suspend or lower payments temporarily
4 Look into Loan Consolidation
Federal loan consolidation takes several loans and consolidates them into a single loan with payments easier to handle However it can lengthen repayment terms and add overall interest expenses
5 Refinance to Lower Interest Rates
Borrowers with good credit can qualify for reduced interest rates by refinancing private student loans Refinancing can lower monthly payments and make repayment more manageable
6 Talk to Loan Servicers
Borrowers who are experiencing financial hardship should contact their loan servicers right away to negotiate alternative repayment plans before defaulting
What to Do If a Loan Is Already in Default
If a borrower is already in default of their student loan, there are still choices to come back from default and return to financial stability
1 Federal Loan Rehabilitation
Loan rehabilitation permits borrowers to erase default status by producing nine on time payments within ten months Once done the default is erased from the credit history but late payments can still be seen
2 Loan Consolidation
Borrowers are able to combine defaulted federal loans into a Direct Consolidation Loan and enter into an income driven repayment plan This reinstates loan benefits but doesn’t erase the default from the credit report
3 Private Loan Settlement Negotiation
Certain private lenders will accept a negotiated settlement that would permit borrowers to pay less than the amount required to settle the debt This is not always available and might take a lump sum payment
4 Get Legal and Financial Advice
Defaulting borrowers should consider meeting with a financial planner or lawyer to discuss the most favorable choices for escaping default
Last Words
Default on a student loan can be costly financially but is preventable through paying bills on time investigating repayment choices and speaking with the loan servicer Borrowers in default may recover through rehabilitation and consolidation of the loan Making smart decisions on managing student loans early on avoids financial ruin and averts long-term credit damage and borrowing opportunities