Your finances may be severely impacted by student loan debt. US students owe $1.4 trillion in total, and the average load for recent graduates climbed by 6% between 2015 and 2016.
Keeping up with hefty monthly loan payments can be difficult, especially if your finances are limited. You might even fall behind on your payments when money is tight.
Several late payments on a student loan may eventually result in default. A loan default destroys your credit score and causes your lenders to bombard you with collection calls and letters.
Don’t ignore the problem if you’re in danger of going into default on your loans or if your loan servicer has already begun sending you notifications. The monetary repercussions will only get worse.
What is default on a student loan?
You are in default on your student loans if you have ceased paying payments.
Your loans must first be past due in order for them to be in default.
- The day following a missed payment is the first day when your debts are deemed late.
- As long as a payment is past due, your loan remains in default. This implies that even if you make your September payment on time but miss your August payment, you will still be in default until you make up the difference.
- Your loan servicer can (and is likely to) report your account as late to the three main credit bureaus if you reach the 30-day delinquency threshold. Your credit score will be immediately impacted by that.
When you don’t make payments on federal direct loans for 270 days, or nearly nine months, you are in default.
If you have a federal Perkins loan, even one missed payment could put you in default.
The time period for defaulting on private student loans varies from lender to lender. In general, once you are 120 days behind, you are regarded as being in default. More than merely late payments can result in default on private loans. Your loan could become delinquent if, for instance, the cosigner who was assigned to it dies or files for bankruptcy. The same holds true if you declare bankruptcy on your own or fall behind on a different loan.
How defaulting on student loans impacts your credit score
Your credit score will be severely impacted by a student loan default on your credit record. Your payment history accounts for 35 percent of your credit score. One late payment can significantly lower your score, and numerous late payments have a greater negative effect.
If a private lender transfers the loan to a collection agency, your credit is further damaged. If the lender sues you and the court rules against you, the verdict may also appear on your credit record, further lowering your score.
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The credit rating of your cosigner will likewise suffer. A parent or any person who cosigns for your loans is taking on equal liability for the debt. Any adverse marks connected to the cosigned loan that result in a default appear on their credit report as well.
Your financial situation may worsen if you default on any kind of debt. A default on a student loan can stay on your credit report for up to 7.5 years.
- Your landlord might want to do a credit check if you intend to rent an apartment. They might elect to rent to someone else with better credit if they notice that you haven’t made loan payments.
A default on your file could prohibit you from obtaining a mortgage in the future or result in more expensive terms if you intend to purchase a home.
- It may be more difficult to get approved for credit cards, personal loans, vehicle loans, or even utility services due to poor credit brought on by default. Credit checks are sometimes included in the recruiting process by some employers.
In a word, you will probably lose money if you fail on your loans. You can be completely barred from borrowing. The interest rates you pay if you’re approved for loans or credit cards will probably be greater than they would be for someone with good credit.
Find out the status of your loans by requesting your free credit report card on Credit Sesame.
What else might occur if you falter?
In addition to harming your credit, defaulting on your student loans has other consequences.
There may be several repercussions if you fail on federal student loans.
- The entire loan amount can be instantly owing. In other words, your lender would anticipate that you would return the debt in full if you were to default on it. If you still owe $30,000 or $40,000 in debts, it is a terrifying prospect.
- You lose your right to a delay or forbearance.
You lose access to other advantages like choosing your own repayment option.
- Federal student loans are off limits until your default is resolved. If you’re still trying to complete your degree and you have to take out more debt to pay for tuition, that could be an issue.
- Your tax refund or other federal benefits may be withheld by the federal government and offset against any defaulted loans.
If you are employed, your wages can be garnished. If you defaulted due to financial hardship, a wage garnishment can make it extremely difficult for you to get by.
- Your loan servicer may file a lawsuit against you to recover the debt. Collection expenses, legal fees, or court costs may be added to the total in the interim.
- Your academic record may not be released. Your school may elect to withhold the publication of your academic record until your loans are paid in full. This could be a barrier to admittance if you’re attempting to enroll in graduate or professional school.
When a borrower defaults on a private student loan, the individual lenders decide what to do. Nonetheless, in most cases, your loan debt would become immediately owing and full. You could be sued for the debt and late fees or other penalties could be applied to the sum. Also, the lender would probably reject your application for any further private loans.
How to stop defaulting on your student loans
Paying off everything you owe in full is the quickest approach to bring your debts out of default. That might not be practical. The type of debts you have will determine how you go about getting out of default if you are unable to make the full payment.
You have two choices for federal loans.
Rehabilitating a loan
In order to bring your loans current, rehabilitation enables you to negotiate a payment schedule with your loan servicer depending on your income. You must formally commit to paying nine times on time over the course of ten consecutive months.
The loan holder determines the payment amount, which is typically equivalent to 15% of your yearly discretionary income divided by 12. Discretionary income is the portion of your adjusted gross income that is over the state- and household-specific poverty line by 150 percent.
If you find that you are unable to make that payment, you can request that your loan provider determine an alternative payment depending on the amount of money you have left over each month after paying your bills.
These payments wouldn’t count toward the nine installments necessary to rehabilitate your loan if your wages were already being garnished due to a past-due loan. Your loans are no longer in default once you have made those nine payments.
Rehabilitating your credit has the advantage of restoring your eligibility for federal aid benefits including deferment, forbearance, and loan forgiveness. Also, the default is deleted from your credit report.
Your loans can only be rehabilitated once. If you fail on your loans once again, you won’t be given another chance.
Consolidation of debt
Your federal loans that have fallen into default might be combined into one Direct Consolidation Loan. In essence, you are exchanging your current loan for your previous loans.
You must either consent to an income-driven repayment plan for the new loan in order to use this option, or make three consecutive, on-time monthly payments on the defaulted debt prior to consolidating it.
The way credit is impacted by rehabilitation and consolidation is one of their key differences. Although the default is not removed from your credit report when you consolidate, you do get back all of your federal student aid benefits, including deferment and forbearance.
Preventing the default of private student loans
Your options if you fall behind on a private student loan depend on the lender.
Asking the lender if they have a program to help borrowers in default is the first thing you can do. If you’re going through a real financial hardship, some lenders might temporarily cut your monthly payments or let you put your loans in forbearance. Of course, you’ll have to present proof.
Also, you might think about refinancing your student loans. This is comparable to consolidation in that your current loans will be rolled into a new one. Nevertheless, if you already have a history of loan defaults on your credit report, you may run into trouble here. For a refinance loan to be authorized, you might require a cosigner.
Provide your loan servicer a settlement as a third choice. When you settle a debt, you ask your creditor to forgive the unpaid balance and accept a reduced amount from what is owed. You might be able to settle your defaulted loans if you don’t have a huge debt load and have money on hand to barter with. Nonetheless, a settlement would appear on your credit report.
If you believe you could default, don’t put it off.
Many factors can lead to student loan default. It’s crucial to consider what you can do to prevent loan default if you believe there is even a remote possibility that you may do so.
Restructuring your repayment strategy could be the answer if you have federal loans. Income-driven repayment plans are created to give borrowers some payment flexibility so they may make their payments on time without feeling overly stressed. There are four options for income-driven repayment plans:
- Pay As You Earn Repayment Plan Update (REPAYE Plan)
- Strategy for Repayment Based on Earnings (PAYE Plan)
- Plan for Income-Based Repayment (IBR Plan)
- Income-Based Repayment Program (ICR Plan)
How much you can afford to put toward your debts each month depends on which of these alternatives you choose and is determined by your income. Your contribution for the first three plans is equal to 10% of your discretionary income. You would pay the lesser of the following for an income-contingent plan:
- 20% of your discretionary income, or the amount you would have
- To pay over 12 years under a repayment plan with a fixed payment, adjusted for your income
There is a caveat to these payment plans, even if they can help you manage your payments better. Depending on whatever plan you select, your repayment time is increased to 20 or 25 years. Over the course of the loan, your interest payments will increase the longer you make loan payments.
Any outstanding balance on an extended repayment plan for a federal loan will be waived once you have completed all of your scheduled installments. Taxes on the amount forgiven may be due.
An income-driven repayment plan, which could prevent credit harm if you’re about to default, will almost certainly end up costing you more money in the long run.
Private student loans do not offer the option of income-driven repayment schedules. It’s in your best interest to get in touch with your lender as soon as you can if you’re concerned about defaulting, whether you have government or private loans.