When you enter into a student loan agreement. You make a promise to repay the loans in accordance with the repayment plan offered to you. As long as you make these payments, your loan is in good standing. But if you fail to maintain this monthly obligation, lenders will label your loans as in default.
Unfortunately, there is no universal time period that dictates when a loan defaults. Therefore, different borrowers abide by different standards. To determine the default policy on your private loans, check your promissory note.
What Happens When You Default on Your Student Loans
Once your student loan defaults, a chain reaction of events will likely occur. This includes calls from your lender or the debt collection agency that was charged with collecting your unpaid debt. However, there are many more consequences to consider.
One of the primary concerns, at least from a consumer standpoint, is the impact a loan default will have on your credit history. Even a single default on a loan can result in a significant decline in your credit score. Therefore, default activity will remain on your credit report for seven years.
Having a lower credit score will make it significantly harder to secure credit cards and loans in the future.
Types of Student Loan Default
They are two major types of student loan default, which includes;
Federal Student Loan Default
If you default on your federal loans, one of the first things you will lose is protections and benefits. Which includes; deferments, forbearance, access to flexible repayment plans, and loan forgiveness.
Additionally, if you remain in default, federal benefits like Social Security and tax refunds can be withheld as repayment. Similarly, the federal government can garnish up to 15 percent of your wages, meaning a portion of your paycheck will be sent directly to the lender.
Finally, when you default, you may also find that you are on the hook for the entire sum of your loan plus interest immediately, and you may also face additional debt collection fees.
Private Student Loan Default
Defaulting a private loan also can leave both you and your cosigner vulnerable to a host of negative consequences.
While the federal government reserves the right to garnish your checks or keep your tax return. Private lenders must go through legal channels to do so. Which means that you and potentially your cosigner will likely be sued by the lender.
That can result in legal fees as well as wage garnishment for up to 25% of your paycheck. The lender can also secure a court order to seize assets or place liens on any property you own.
How to Avoid Student Loan Default
If you’re consistently submitting late payments, or if you’ve already missed a monthly payment completely, it could mean that loan default is possible.
If you think you may default on your loans. There are several steps you can take to prevent it including;
Contact Your Lender
If you can’t afford to make a payment in the first place, then your next step should be to contact your lender to learn about your options. In some cases, you may be able to enter into deferment or forbearance, though only private loan holders may have access to forbearance.
Revisit Your Payment Plan
If you have a federal student loan, you may be able to enter into an income-driven repayment plan, which might result in a more affordable monthly payment that accommodates your income and family size.
While private student loans don’t offer the same level of protections available to federal student loan borrowers, some private loan programs will offer their own version of flexible repayment options.
Consolidate and Refinance
Both consolidation and refinancing allow borrowers to replace one loan, or several loans, with one monthly payment. The benefit is typically simplifying federal loan repayment and getting lower monthly payments due to an extended repayment period.
Private loan consolidation, which is frequently referred to as student loan refinancing, is also an option for borrowers who have private and federal student loans.
In the case of private refinancing, you may be able to secure a lower student loan interest rate. That is if you act before your credit has been impacted. Otherwise, you may need a cosigner.
Before you refinance your student loans, it’s important to recognize the potential ramifications, particularly when it comes to moving federal loans to the private space.
In this case, refinancing loans, as opposed to consolidating them through a direct consolidation loan, can result in the loss of rehabilitation programs like income-driven repayment plans and loan forgiveness.
Things to Do if You Have Defaulted on Your Student Loans
Getting out of student loan default is possible, though your options depend on what type of loan you have.
– Loan Rehabilitation
Loan Rehabilitation is available to federal student aid borrowers who have a Direct Loan, a Perkins Loan, or a Federal Family Education Loan.
To take advantage of one of these programs, you must voluntarily (e.g., not via wage garnishment) make nine consecutive, reasonable payments (determined by your lender) within 20 days of your due date.
– Direct Consolidation Loan
Federal borrowers can also take advantage of a Direct Consolidation Loan, which will consolidate their loans and enter them into a new student loan repayment agreement.
In this case, the borrower must agree to participate in an income-driven repayment plan and voluntarily make three consecutive, on-time monthly payments on the defaulted loan, prior to consolidation.
In addition to preventing a default, refinancing can also help you get out of default status. If you refinance your loan, you will be taking out another loan to repay the loan that is in default status.
Unfortunately, with a default on your credit report, you may have trouble qualifying for a loan on your own. In this case, you will need to consider asking a friend or family member to act as a cosigner on your loan.
– Settle Your Debt
In summary, whenever you take a loan, you are on a legal agreement with you lender that includes your payment obligations. If most times you fail to meet those obligations, you will be defaulting the student loan. That will have a very negative implication on your financial score.
There are numerous ways that you can prevent default, many of which start with a call to your lender to discuss your options. However, if you’re already under a default, you do still have options that can help you move back into good standing with your lender and begin to rebuild your credit and your financial life.