Everything you need to know about defaulting on a student loan.
Student loans are specifically designed to help students pay for undergraduate, graduate or professional degree programs including tuition fees and any other associated expenses like living expenses and books and supplies. Although it may differ from other loans, the key features of student loans make it so much more affordable for students.
The interest rates are substantially lower and the repayment schedule can be deferred while you are still in school. Student loans differ in many countries due to the strict laws regulating renegotiating and bankruptcy.
However, defaulting on these loans is a serious matter that needs to be taken into consideration. Before you even apply for student loans, you should be clear about the consequences of federal student loan default, how you can prevent it and if you are already in default, what you can do next.
When do Student Loans Default?
You are the only one responsible for repaying your student loans regardless of whether you graduate or not. Even if you have trouble finding a job after you graduate or just was not a fan of your school, you would still be required to pay back your student loans.
If you fail to make your student loan payments for 270-360 days and do not even make arrangements with your lender for a deferment or forbearance, your loans will automatically be in default.
What Happens if you Default on Federal Student Loans?
If you do default on your loans, they may be turned over to a collection agency. You can be held liable for the costs associated with collecting your loan. This can include court costs and attorney fees. You may even be sued for the entire amount of the loan. Your wages may end up being garnished and the federal and state income tax refunds you receive may be intercepted. The federal government can also choose to withhold part of your social security benefit payments if they wish. These defaulted loans will also appear on your credit history for up to 7 years after you have paid the default claim. This can tarnish your credit history and ruin your chances of obtaining an auto loan, mortgage or even credit cards.
Moreover, you will not be receiving any more federal financial aid until you have repaid the entire loan amount in full or have made arrangements to repay what is already owed. You will be required to make at least six consecutive, on-time monthly payments and will not be eligible for assistance under any federal benefit programs.
Furthermore, you will be declared ineligible for deferments and will be denied the subsidized interest benefits you could receive. You will also fail to renew a professional license you hold and may even be prohibited from enlisting in the Armed Forces.
So yes, defaulting on your student loans can have major consequences besides having to pay the full amount of your loan. This is why you should be well prepared to deal with them if you decide to default.
Should I let my Student Loans Default?
If you are struggling to make your monthly payments on a federal student loan, there are other ways to take care of the situation besides letting your loan default.
You can choose to get deferment, in which the lender allows you to temporarily postpone repaying the principal of your loan. Most federal programs will allow students to make arrangements for deferment while they are still in school, even if they are half-time students. No interest accrues for Perkins Loans and Subsidized Stafford Loans during the deferment period as the federal government takes over the responsibility of paying the interest.
Students can choose to postpone the interest payments on these loans by capitalizing the interest. This will increase the size of the loan.
Deferments are usually granted for students who have been enrolled in either undergraduate or graduate school including disabled students participating in a rehabilitation training program, economic hardship and unemployment.
However, these deferments are only for the FFELP and FDSLP loans and not the Perkins loans. They are not granted automatically. You will be required to submit an application and provide the relevant documentation in order to support your request for a deferment. You should not stop making payments on your student loans until you have been notified about your deferment being granted.
Another way to manage your student loans while struggling to complete your monthly payments is forbearance in which the lender will allow you to temporarily stop or reduce the loan payments. However, the interest would continue to accrue and you will be required to continue paying the interest charges during the entire forbearance period.
Forbearances are usually granted for up to three years with 12-month intervals. They are not granted automatically. You are required to submit an application and provide the relevant documents in order to support your request for a forbearance.
They are usually granted at the lender’s discretion. When the borrower fails to qualify for a deferment but is facing extreme financial hardship or other circumstances that has made it difficult for the borrower to make their monthly payments, forbearance comes in handy.
Again, just like with deferment, you should not stop making your federal student loans payments until you have been notified of your forbearance being granted.
To get out of default, you will have to make arrangements with your servicer or lender in order to repay the loan. You will be required to make six consecutive full on-time payments after which you can be eligible for additional Title IV aid. On-time payments have to be made within 15 days of the due date.
The payments must be affordable and reasonable in order to qualify for loan rehabilitation. This is determined by the guarantee agency who will then consider the borrower’s disposable income and financial circumstances.
Moreover, if you are seeking rehabilitation but your wages are subject to a student loan default wage garnishment order, the guarantee agency might be willing to accept the higher rehabilitation amount or the wage garnishment amount as opposed to the sum.
If you have been in default recently and you bring the delinquency under 270 days within the 90 day period before the lender files a default claim, the default can be cured or you could be eligible for student loan default forgiveness.
You can also try to cure the default by consolidating the delinquent loan before the lender has even filed for a default claim. The consolidation loan, since it is a new loan, will help wipe the slate clean for you.
Even though lenders have very powerful options to collect the defaulted amount that is owed, they would not need to negotiate. Lenders prefer the borrower to have a voluntary payment plan than take the borrower to court. However, always keep in mind that a payment plan is where you pay about 1% of the total amount that is owed per month.
If you need more information about your options and what you can do when your loan defaults, you should contact your original lender or even the loan servicer. If you do not know who the original lender is or what their name, address and telephone number is, you can contact the financial aid office at your school and they should be able to give you the information you need and provide help and advice about any repayment problems you might have. If that is not a helpful option for you, you can also choose to talk to the Default Resolution Group at the US Department of Education by calling 1-800-621-3115.