Defaulting on Your Student Loan? What Your Need to Know

Young woman student worried over unpaid bills and student loanKeeping up with student loan debt is a financial hurdle millions of borrowers face each year. With more than $1.3 trillion owed collectively among more than 40 million borrowers, it is no surprise that student loan default is a hot topic. Failing to pay student debt on time each month can have drastic effects on multiple facets of your financial life, not only in the immediate term but for a number of years to follow. Whether it’s federal student loan debt or private, here’s what you need to know about student loan default and a few strategies to avoid it.

Breaking Down Default

Being late on a private or federal student loan does not necessarily constitute defaulting on your obligation to repay. Instead, default means there has been a significant amount of time in between full payments altogether, or a violation of the terms and agreements of the loan has occurred. In some cases, a default may also take place if it is found that a student loan was taken out under false pretenses (omitting information on an application or being otherwise misleading). In any of these scenarios, a student loan lender may designate the loan as in default.

For federal student loans, borrowers have a long time before a loan is categorized as in default. Typically, failing to make a payment for 270 days, or nine months, means you have defaulted on your federal student loan. The time frame for default varies for private lenders, but it is common that the non-payment period is far shorter than what federal student loans allow.

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What Happens Next?

Student loan borrowers who are on the cusp of defaulting on their loans may receive a handful of letters or phone calls from the lender asking for payment. When payments remain outstanding, the lender assigns the debt to a collections agency which often escalates the communication to the borrower. The lender also has the ability to sue the borrower directly for any unpaid amount still due on the loan – a process that can add up to hefty fees. Not only is the principal and interest owed, but the lender or debt collection agency can also add legal fees and penalties to the mix.

In addition to having a collection or legal action taken against you, defaulting on federal student loans means you give up any benefits you had through the Department of Education. These benefits including the possibility of deferment, forbearance, income-based or reduce repayment plan options, and certain forgiveness programs offered by the federal government. Borrowers with federal student loans who default also lose access to additional federal funding to help pay for future education.

Both private and federal student loan lenders are likely to report defaulted borrowers to the three credit reporting agencies, leaving a significant black mark on your credit report. Because payment history comprises a significant portion of your credit score calculation, it is inevitable that your credit score will be lower once a default is reported. In some cases, federal or state tax refunds may be garnished to help repay an outstanding federal loan balance, and wages are up for grabs as well.

Avoiding Default

Defaulting on student loan debt has negative consequences that can wreak havoc on your financial life well into the future, but there are ways to avoid defaulting before these ramifications kick in. First, connect with your federal or private student loan lender as soon as it becomes clear repaying your student loans each month will be a temporary or permanent challenge. Federal student loan lenders are able to provide you with various solutions, including forbearance due to financial hardship, deferment, or a new repayment plan based on your discretionary income. While private student loan lenders do not typically offer the same protections to borrowers facing financial obstacles, letting the lender know trouble is ahead may lead to more positive outcomes than simply failing to pay.

If you have been unable to avoid default on your student loans, make sure to respond to any communication received from collection agencies or the lender moving forward. It is far from a comfortable situation, but putting your head in the sand is the wrong course of action. You may be able to settle the debt you owe for a lower amount or work out a repayment plan that fits your budget each month. While your credit will still take a hit, making an effort to repay what you borrowed for your education is more beneficial than avoiding the circumstances altogether.

Posted on August 10, 2017 by in Personal Loans, Student Loans

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