Student loan default occurs when borrowers fail to repay their student loans in accordance with the terms of the loan. Whether we like it or not, a wide range of life circumstances can make it difficult to keep track of monthly student loan payments, and not everyone can just refinance their loans to get a better deal.
Recent figures from the US Department of Education show that at the national level, the student loan default rate is around 10%. Of course, there is a big difference between paying a few days late and letting your student loans go completely. While late payment may be easier to overcome, a true default has consequences that can last for years.
How Does Student Loan Default Work?
When you fail to make a payment on your student loan before or on the day the payment is due, your loan goes into past due status. At this point, your student loan will remain in arrears until you pay the amount you owe, qualify for deferral or forbearance, or change your repayment plan.
Once your student loan payment is at least 90 days overdue, your loan officer will report your late payment to the three credit bureaus – Experian, Equifax, and TransUnion.
At this point, your loan will go from delinquency to default on a different schedule depending on the type of student loan you have.
- With federal student loans, your loan is generally considered to be in default when you miss your scheduled payments for 270 days. An exception is Perkins loans, which can be considered in default if you miss a single payment.
- With private student loans, you are generally considered to be in default after missing three monthly payments, for a total of 120 days.
How do I know if my student loans are in arrears?
If your student loans become past due or past due, you will likely be notified by your loan company or service agent. You may receive a notice by post or email with details of your late payment, but it may depend on the process you normally use to pay your student loan bill.
If you leave your student loan payments in arrears for several months, you can expect them to be in default in the near future. Once your student loans are in default, you should see them listed on your credit reports, which you can view for free from all three credit bureaus using the website. AnnualCreditReport.com.
You can also log in Studentaid.gov to view your status on Federal Student Loans, including any information on overdue, past due, or defaulted amounts.
How does the fault affect me?
Failure to pay your student loans has many consequences, and the damage can take years to repair.
Here are some examples of why you should avoid student loan defaults at all costs:
- With federal student loans, defaulting on your payments can cause your entire loan balance to be paid immediately and any interest you owe through a process called “acceleration.”
- When you default on federal student loans, you are no longer eligible for deferral or forbearance, nor can you change your repayment plan at this point.
- Federal student assistance is not available to students who do not repay their loans.
- With the federal government or private loans, your creditor can sue you.
- Your wages could be garnished.
- Your default will be reported to the credit bureaus, which can cause considerable damage to your credit score.
- Late fees and interest will continue to accumulate on your debts, which means the problem only gets worse.
- You will likely need to pay for court costs, collection costs, attorney fees, and additional costs associated with the collection process.
- Your school may withhold your transcript until you get your student loan repayment.
What happens if I default on my student loans?
If you don’t pay off your student loans and never take steps to turn it around, all of the consequences listed above can eventually materialize. Unfortunately, the results of this financial misstep can impact your life in multiple ways.
If you have poor credit due to a default on your student loans, for example, you may not be able to qualify for a credit card, borrow money to buy a car, or take out a mortgage. to buy a house, regardless of your income.
If you are able to get approved for consumer credit, you could also find yourself paying a higher interest rate and more fees than someone with a good credit rating.
Additional consequences of not paying your student loans could include difficulty signing up for utilities or qualifying for reasonable home insurance rates. You might even have a hard time getting a cell phone plan or qualifying to rent your own home.
How do I get my student loans out if they don’t pay?
If you are struggling with or soon will be delinquent federal student loans, you should know that the federal government has put in place temporary protections due to COVID-19. Specifically, collection activity is currently on hold for delinquent federally owned student loans or grant overpayments. Interest on student loans is also temporarily set at 0% on delinquent federal loans. This temporary relief is scheduled to expire on September 30, 2020.
According to the US Department of EducationThere are three main ways to get your federal student loans out when you default: pay off your entire loan balance, continue with your loan rehabilitation, or apply for a loan consolidation. Since most people cannot afford to pay off their loans all at once, rehabilitation and consolidation are the only options most can consider.
With federal loan rehabilitation, you start by contacting your loan officer. When you rehabilitate a federal loan through the FFEL Program loan, you must:
- Make nine affordable monthly payments (as determined by your loan holder) within 20 days of the due date and agree to these terms in writing.
- Make the nine agreed payments over a period of 10 consecutive months.
The monthly payment you make as part of the loan rehabilitation is usually equal to 15% of your monthly discretionary income. According to the US Department of Education, discretionary income is “the amount of your adjusted gross income (from your last federal tax return) that exceeds 150% of the poverty line amount for your state and the size of your household. family ”.
Due to the way loan rehabilitation payments are determined, your loan amount during the rehabilitation process could be as low as $ 5 per month.
With consolidation of federal loans, you have the option of combining your existing federal student loans into a new one. To be eligible for this plan for delinquent loans, you must do one of the following:
- Pay off your new direct consolidation loan as part of a income based repayment plan.
- Make three consecutive, voluntary, on-time, full monthly payments on the overdue loan before consolidation.
Keep in mind that the rules are different for private student loans. If you have private student loans in default, you may be able to negotiate a settlement on your debt collection. You can also try working with your loan company to get you up to speed, which you can facilitate by communicating and explaining your situation.
Many people with private student loan debt that they cannot manage also end up seeking help from a student loan lawyer.
Once you’ve taken steps to clear your student loans, it’s important to avoid making the same mistakes again. Your best bet is to make sure that you have a monthly payment that you can afford without financial hardship.
You can do this by:
- Consider income-driven repayment plans that allow you to pay a percentage of your discretionary income on your loans for 20 to 25 years.
- Refinance your student loans with a private lender in order to obtain a lower interest rate and a more affordable payment.
- Choose from federal student loan repayment plans (for existing federal loans), which can allow you to pay off your loans for up to 30 years.
Also, be sure to prepare for success when it comes to planning your student loan repayments. It might mean starting a monthly budget that helps you plan each of your bills and average expenses, but it can also mean reducing discretionary spending so you have more wiggle room in your budget each month. Finally, you can also consider setting up automatic sending of your student loan repayments so that you never forget to pay.
Questions to consider
Can I dispute student loans after 7 years?
While it is possible to dispute incorrect details on your credit reports and that the information is removed, negative scores based on delinquent student loans will remain on your reports for at least seven years. Student loans are notoriously difficult to pay off in bankruptcy, and disputing them on your credit reports won’t help you either.
Your best bet is to make sure your payment is affordable and that you pay what you owe no matter how long it takes. However, you should keep in mind that some student loan exemption programs can help you get rid of your debts as soon as possible.
What happens if I can’t repay the student loans?
If you can’t repay your student loans right now, you may want to consider a federal government deferral and forbearance. Both allow you to put your student loan payments on hold while you get back on your feet. Interest can still accrue during this time, but either type of relief can save you time.
Can you go to jail for defaulting on a student loan?
Generally speaking, you cannot go to jail for defaulting on your student loans. However, your lender can and will likely sue you, your credit score could take a hit, your paycheck could be foreclosed, and you could end up owing significantly more fees and interest in the long run.
Image presented by David Pereiras of Shutterstock.