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What Happens If I Default On My Student Loans?

Default is the scariest word a borrower can hear, especially one dealing with heavy student loan debt. Student loans have some harsh penalties if you don’t pay and failing to stay on top of them can crush your credit score. But how does a loan reach default and what options do borrowers facing mounting penalties have? Student loan default should be avoided at all costs, but hope isn’t lost for borrowers who do. Knowing your options is crucial to avoiding long term repercussions. And those repercussions can be very, very long term.

What is Default?

Your loans will reach default after a certain period of non-payment. After missing a student loan payment, your account will immediately enter delinquency. Delinquency remains until payment is made and if no payment is received for 90 days, it will be reported to the big three credit bureaus – Equifax, Experian, and TransUnion. Late payments get marked on your credit report and send your score downward. If you still haven’t made payments after a while, you will enter default and the lender will come after you wanting payment in full.

When is a Student Loan in Default?

Terms of student loan default can vary by lender, but federal loans will be considered in default after 270 days of delinquent payments. You’ll have plenty of warning that this is happening, so don’t claim to be surprised. It takes nine months for delinquency to turn to default and you’ll get plenty of messages from your lender informing you of your status.

You won’t get a nine month grace period with private lenders. You’ll usually get three months, but some private lenders consider a loan to be in default after one missed payment. Always, always, always read the loan contract thoroughly because information about delinquency and default will be on it. In fact, never sign on the dotted line until you completely understand the terms of the loan. Private lenders will watch eagerly as you sign your life away, so don’t do it until you have all the facts.

Effects of Defaulting on Student Loans

Prepare for life to get a lot harder if you default on student loans. After a loan has reached default, your lender will demand payment in full and send notice to a collection agency. And that agency will call and call and call. (But remember you have rights when it comes to battling collection agencies). Additionally, the default will remain on your credit report for seven years, making it difficult to get bank loans, a mortgage, even a loan for a car. You’ll be seen as a high-risk borrower and any loan you do get will have an unfair interest rate.

For federal loans, the government has a few ways to collect from you:

  • Your wages may be garnished up to 15%
  • Any income tax refunds may be withheld
  • Your social security and retirement funds can be withheld
  • You will be denied any future federal funding
  • You will lose the ability to enter a federal benefit repayment plan (like income based repayment)
  • You’ll pay penalties for the collection of the defaulted debt

With private loans, your lender will send a collection agency after you, but can’t garnish your wages without a court judgment. But you’ll likely be sued and taken to court. If a judge rules in favor of the lender, you could have your wages garnished up to 25% and may need to surrender financial assets like retirement accounts or real estate.

Whether federal or private, defaulting on student loans will absolutely torpedo your credit score, making it nearly impossible to establish new lines of credit. And you’ll still owe the full balance, plus any late fees or collections charges.

How to Get Out of Student Loan Default

Paying your balance in full is the easiest way to get out of student loan default. However, you likely struggled with your monthly payments to begin with if you’re defaulting. And unless that fishy email is really from a Nigerian prince, you probably aren’t due to receive a huge cash windfall. Two more practical methods for federal loans are rehabilitation and consolidation.

During rehabilitation, you’ll come to a repayment agreement with your lender to get your loan out of default. Lenders usually require nine on-time payments over 10 months IN ADDITION to wage garnishments or withheld refunds. For federal loans, you’ll be eligible to re-enter a debt assistance program after six consecutive payments. Rehabilitated loans will have the default status removed from the borrower’s credit history, but collection costs will still rack up and you can only use rehabilitation once.

Consolidation is a popular technique for helping with student loans. For borrowers in default, consolidation can bring them back into good standing, but you must have a loan to work with that ISN’T in default. Basically, you need to pair the bad loans with good ones. Before consolidating a federal loan, you will need to make three on-time voluntary payments to your defaulted loan. After consolidating, you’ll have one new loan with a different repayment structure. Consolidation helps lower monthly payments, but adds years (and interest) to the life of the loan.

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