Student loans may not feel real at first. They may feel like something that doesn't need to be faced for years. But when a loan goes into default, it's serious. The time to face the loan has arrived – for some time now. Going into default means the borrower hasn't held up their end of the bargain. The borrower has failed to make payments according to the terms of the promissory note. This article is about what happens from the moment a loan goes into default and what paths can be taken to recover. Even if the borrower doesn't have the money to repay, all hope is not lost. Student loan default is serious but it's not the end of the road.
How a Student Loan Default Occurs
For most student loans, a default occurs when the borrower fails to make a payment for 270 days. This applies to all federal loans except the FFEL Program loans, which go into default after 330 days. Nearly every private student loan is considered to be in default 120 days after non-payment. Needless to say, the problem has been compounding for some time.
Student loan default notices sometimes come by error. For instance, federal loans do not need to be repaid if the borrower is still attending school on at least a half-time basis. If this is the case, contact the lending agency and be prepared to provide proof of enrollment. Or the loans could be in forbearance or deferment. Confirm that the start and end dates of either forbearance or deferment have been applied to the account. Everyone makes mistakes. Finally, perhaps payments sent have not been applied to the loans. If this is the case, provide proof of payment and ask for the account to be updated. Checks go missing all the time.
Recovering from Student Loan Default
If the default is accurate, there are still ways to recover. According to Federal Student Aid, a student should take the following steps:
Step 1: Contact the lending agency that is sending the bills
Step 2: Explain your situation fully
Step 3: Ask what options are available for getting out of default
Step 4: Ask the agency for guidance through the recovery process
Step 5: ALWAYS keep in touch with the lending agency – ignoring them will make things worse
Each agency will offer unique repayment options. The Consumer Financial Protection Bureau offers a sample letter and worksheet which helps borrowers spell out how much they can afford to pay. It can be used for either private or federal loans. Presenting something like this to the lending agency shows commitment to repay, even if the ability is not quite there at the moment.
Before getting too discouraged, keep this in mind. Lenders want to have their debts paid. This means they are willing to do whatever it takes to get those payments. They will cooperate. Think of it as a mess for both parties.
Once this mess is sorted out, there will be some lasting repercussions. If federal student loans go into default, privileges such as federal forgiveness programs, forbearance, deferment and access to different repayment plan options will vanish. A lower credit score will be another lasting issue. Furthermore, a lower credit score will have effects on future loan interest rates (house, car, etc.) and may even impact future employment opportunities. Collection fees may also be applied to the balance. This is another expense on top of principal and interest.
Expecting a tax refund this year? Forget it. A tax refund offset may be applied. This means the tax refund gets completely put towards loan repayment.
Wage garnishment could also happen. The government can deduct up to 15 percent of the borrower's paycheck. Yes, it's true. The lender wants the debt to be paid just as much as the borrower.
Defaulting on student loans is serious. And keep in mind, few people can avoid student loan debt. It's basically the hardest type of debt to discharge. Student loan default is serious but there's always a way to rise above. Use this article as a guide for rising above this difficult time.