Student Loan Default
Steps to Take Before You Default on Loan Repayment
Since 1990, the amount of federal money borrowed under the Direct Loan Program or the Federal Family Education Loan Program (FFELP) has more than tripled. This of course indirectly corresponds to the number of students that must manage student loan repayment once they graduate or leave school. “Manage” is the key.
When you are in default on your student loans—federal loans or private student loans—you have essentially failed to maintain agreed upon monthly loan payments, not just one or two, and you’re not just delinquent on a couple payments, you’ve failed to make even one loan payment in over 270 days—that’s almost 9 months! It’s simple; there is no excuse for loan default. Why? Because the student loan industry has made so many alternative choices available. And because of these interventions the default rate has dropped to historic lows.
Listen, here are a few of the consequences to loan default:
- Reported to the credit bureaus.
- Wage garnishment.
- Income tax garnishment.
- Collections agents harassing you.
- Credit in disrepair for years.
- Loan repayment choices become much more limited.
Are you shopping for that kind of financial fall-out? If you’re expecting to file Chapter 13 or Chapter 7, find out why filing for bankruptcy will not cancel your student loans.
**Right now, use this resource as a guide to the choices you have when it comes time to deal with your unstable student loan repayment plan.
Remember that promissory note you signed when you were approved for your loan(s)? That legally binding financial document stipulates that payments of a certain amount be rendered to the lender by a certain date each month. It’s okay to have financial difficulty: you could have a sudden change in your income, lose your job unexpectedly, be suddenly faced with a major and necessary personal expense, or a variety of other factors could undermine an otherwise well-balanced financial situation. And it’s not just new grads that face financial turbulence.
When You Default on Your Federal Loans
Should you default on your Federal Stafford, Perkins or PLUS loans, any pre-existing repayment program is null and void. The balance of your student loan is immediately due to the lending agency and all defaulted loans become the responsibility of the Department of Collections. It is very important that you contact the Federal Student Aid program and ask them what your options are now that you’ve entered default. A loan officer will assist you in finding a suitable repayment option.
Before You Default
If you are struggling with loan repayment the best bet is to manage it wisely. Here are some excellent options that can save your credit record before you default:
- Loan repayment plan.
- Loan consolidation.
- Loan deferment.
- Loan forbearance.
Loan Repayment Plans
When you initially borrowed money for your loans you signed up for a specific type of repayment plan: standard, graduated, extended, or income sensitive/contingent. You may make significant alterations to your loan repayment just by changing the repayment plan. Contact your lender directly and ask how you can change repayment terms.
Loan Consolidation
You have two types of loan consolidation available: federal student loan consolidation and private student loan consolidation.
If you have more than one federal student loan and are experiencing difficulty in repayment you might take a closer look at consolidating your federal loans. Typically you turn multiple loans into one; make one monthly payment that could be as much as 50% lower than your previous monthly outlay. Consolidate private loans as well if necessary. If you have multiple federal and/or private student loans and have regular financial problems with making ends meet take our self-assessment quiz; find out right now if you are a candidate for loan consolidation.
Loan Deferment
If you are returning to school at least half time, make sure you take advantage of the in-school loan deferment programs offered through your lender. When you defer a loan you postpone repayment of principal until you graduate or drop below half-time enrollment. And what’s even better: the government pays the interest while you’re in school.
Are you going to be unemployed for a period of time? Unemployment deferment may be an option.
In either case, contact your lender for more specific details and ask if this these are practical solutions for you.
Loan Forbearance
Loan forbearance is useful for short-term economic setbacks, such as job layoff or short-term unemployment. Forbearance means postponement of interest and principal, but unlike deferment you will be ultimately responsible for interest.
Economic Hardship
What if you are not going back to school and you are employed, but you make so little money that you cannot afford to make your student loan payments? You could apply for economic hardship, which means your income is assessed in conjunction with average poverty levels. If your income falls below the accepted level then you may qualify for economic hardship status.
**Once you default, these loan repayment options are no longer available to you, out of the box, so to speak. To qualify your lender will typically require you to make a specified number of on time loan payments to get yourself back on track and as a show of good faith.
It is important to your financial future that you explore all your repayment options before you let your loan default. Defaulting on your student loans is a worst-case scenario and can usually be avoided with proper planning. Remember, no lender wants a borrower to enter default status. And most lenders, both Federal and private, are willing to make repayment on defaulted student loans simple and convenient.