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Updated on Wednesday, August 12, 2015
Have you been struggling to make the minimum payments on your student loans? If so, you might be at risk of defaulting on them. The worst thing you can possibly do with any debt is end up in default, as there are dire consequences that could wreck your credit for years to come.
If you’re wondering what happens when your student loans are in default, what that means for you, the difference between being delinquent or default on your loans, or how you can get out of default, read on for some advice.
Defaulting vs. Delinquency
There’s a huge difference between simply being delinquent on your student loans and defaulting on them.
Your student loans are considered delinquent as soon as you fail to make a payment on them. After 90 days, the lateness is reported to the credit bureaus.
Some private student loans have different rules – missing one payment may cause your loans to go into default. It’s important to understand the terms of your agreement for that reason.
Defaulting typically means your loans haven’t been paid for 270 days or more (if you pay on a monthly basis). If you pay less than once a month, your loans are considered default after 330 days of no payments.
Why exactly can a loan be considered “in default”? When you borrowed the funds for your student loans, you signed a master promissory note, which was a promise to make good on repaying the loan under the terms you agreed upon. Failure to pay directly violates that agreement.
Consequences of Defaulting on Your Student Loans
There are several severe consequences of defaulting on your student loans. You may or may not know that the government can garnish your wages and keep your tax refunds to collect payments if you have any debt in default. It’s not a good feeling to know your income can be taken away like that – in a sense, it doesn’t even belong to you.
Both the government and private lenders can also sue you. Your credit may take a major hit, and this will make it incredibly difficult to qualify for any financing. Additionally, you might not get approved for utilities, an apartment, a cell phone plan, or renter’s / homeowner’s insurance. As you can see, the negative effects of a bad credit score are far more than just access to credit. Plus, a late payment can take up to seven years to drop off your credit report.
With federal and private loans, your lender can go through the normal process of sending your student loans to collections. You may receive calls from debt collectors, and you’ll also incur late fees or returned payment fees, and thus, bank fees (if your account is negative or overdrawn). Interest will continue to accrue as well.
With federal student loans, your entire remaining balance becomes due once you’ve defaulted. Talk about overwhelming! You also lose access to all federal student loan benefits such as forbearance, deferment, and alternative repayment plans.
If you’re thinking about going back to college, you also won’t be eligible for more aid.
Are you a federal employee? 15 percent of your disposable pay can be offset by your employer to go toward repaying your loans.
As for private student loans, again, make sure you check and understand the terms of your agreement. If you have any questions, contact your loan servicer so they can explain how their system works. Private lenders generally have to go through some more hoops to collect payment, but that doesn’t mean they won’t. Each lender is different.
How to Get Out of Default
You may have heard that you can’t include student loan debt in a bankruptcy – that’s not exactly true, but there’s an easier way to rehabilitate your loans.
First, if you only have federal student loans, you may have an easier time getting out of default. That’s because consolidating your student loans with the Direct Federal Loan Consolidation program actually allows you to get out of default.
Yes, you can consolidate loans that are default, but you must make voluntary payments and arrangements with the Department of Education beforehand. Typically, that means three timely and consecutive payments.
Second, if you can get access to the money, repaying your remaining loan balance in full, all in one lump sum, will get you out of default.
Third, if you have federal student loans, then you can rehabilitate them through a government program. There are several steps involved in the process, and you must be in a position to make nine out of ten consecutive monthly payments. You can only miss one month, though ideally, you can make all payments without trouble.
Thankfully, your payments under the rehabilitation program should be more manageable. This is due to the fact you’ll be under an income-based repayment plan. If you were repaying under the standard 10-year repayment plan, then your monthly payment will be less than you’re used to.
Once those nine payments are made, you’ll be able to get the default off your credit report, restoring the status of your loan and your credit score.
Note that any payments made toward your loans via wage garnishment before you began rehabilitating your loan will not count toward your balance. Also, if any delinquencies were reported before you defaulted, they will not be removed from your credit – only information associated with the default is removed with rehabilitation. Lastly, if there are any collection/late fees due, they will be added to your total balance, increasing the cost of the loan.
Takeaway: Take Action As Soon as Possible
Again, if you’ve been struggling to make payments on your student loans, you need to get in contact with your loan servicer immediately. Some servicers will be willing to work with you, especially if you’ve already been paying on time. This is doubly true for those with private student loans.
Explain your situation to your servicer and how you would benefit from a lower monthly payment. They may be able to provide you with an alternative, such as lowering your interest rate, increasing the length of your term, or granting you a period of forbearance or deferment.
Even if your loans are already in default, you should get in touch with your loan servicer. They won’t be able to help you unless you talk to them and let them know you’ve been experiencing financial hardship. Don’t count on a lender to take the initiative – that’s up to you.
Also, in some rare cases, your loans may have been reported as default in error. If you’re certain you’ve been making payments and haven’t been late, get in touch with your loan servicer to see what records they have on file.
Remember – you have nothing to lose and everything to gain by contacting your loan servicer and ignoring your student loans won’t make them go away. The more days that go by without a payment, the worse your situation gets.