What Happens If You Default On Student Loans?
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According to recent statistics, the United States has somewhere in the ballpark of 44.2 million student loan borrowers with a collective debt of $1.3 trillion. With average student debt ranging from $18,873 in Utah to $36,101 in New Hampshire in 2015, it’s no wonder some graduates struggle to keep up with their loans and monthly payments.
Unfortunately, students short on funds due to unemployment, underemployment or financial hardship can get into student loan trouble fast if they put their student debt off and quit making payments altogether. While a late payment or two may not spell disaster, defaulting on your student loans may come with financial implications that last a lifetime.
In this guide, we’ll highlight exactly what happens when you stop making payments on your student loans, the consequences you’ll face, and how to get your loans back in good standing.
The first factor to keep in mind when it comes to student loan default is the fact it takes a while to get there. Before your student loans are in default, they will become delinquent.
Delinquency: Delinquency is a term used to describe any late payment on your student loans. Loans become delinquent the first day your payment is late.
The consequences: Once you are more than 90 days late making a federal student loan payment, your student loan servicer will report the delinquency to the three major credit reporting agencies — Experian, Equifax and TransUnion. Because of this, delinquency may lower your credit score and affect your ability to qualify for credit.
Default: Default takes place when your loan continues to be delinquent. The point at which a loan is considered in default depends on the type of student loans you have. For example, loans in the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program are in default once a payment hasn’t been made for at least 270 days.
The consequences: The consequences of student loan default can be severe and may include the following:
- The entire unpaid balance of your loan and any interest you owe will become due immediately through a process called “acceleration.”
- You are no longer eligible for federal deferment or forbearance, and you may not be able to choose your own repayment plan.
- You may lose eligibility for federal student aid.
- The default will be reported to the three credit reporting agencies, which will result in damage to your credit score and hurt your ability to qualify for new credit.
- Any tax refund or federal benefits payment you receive may be withheld and applied to repayment of your loans using a process called “Treasury Offset.”
- Your wages could be garnished, meaning your employer may be required to withhold a certain amount of your paycheck to repay your loan.
- Your loan holder could take you to court, and you could be liable for court costs, attorney’s fees and collection fees, along with other expenses.
- You may be unable to purchase or sell certain assets such as real estate.
- Your school has the option to withhold your academic transcript until your loan is paid off or back in good standing
It’s easy to see how student loan default can have a severe impact on your life, whereas temporary delinquency may have only a short-term impact on your credit. This is why, even if you’re late on your student loans for reasons outside your control, you should try to avoid student loan default at all costs.
Not only can default do serious damage to your credit, but it can impact your ability to earn a living and build a life.
While delinquency and default are common terms for all types of student loans, exactly what happens after you default can vary depending on whether your student loans are federal loans or private loans.
Because private student loan companies are private businesses, they are known for being less flexible with graduates who default on their loans. However, what happens after you default can vary quite a bit based on the state in which you live, company policy, and your specific loan contract.
Here’s a general timeline of what could happen after you default on private student loans:
- Generally speaking, your private school lender will report your loans as delinquent to credit reporting agencies once you are 30 to 90 days late with a payment. However, some lenders may report your late payment immediately. Either way, these negative reports will be placed on the credit report of the borrower and any co-signers on their private student loans.
- Unlike federal student loans, which are generally considered in default after 270 days, private student loans may be considered “in default” in short order — usually at three months after a late payment.
- Students in default on their private student loans may receive follow-up and collections letters from their loan company as early as a few weeks after their first late payment.
- If you’re a parent who co-signed on your child’s private student loans, you may also begin receiving letters asking for payment as early as a few weeks after the first late payment.
- Your account will be sent to collections, which will likely result in collections letters and calls for both the graduate and any parent or guardian who co-signed on the loan.
- Your private lender may add collections charges to your student loan balance.
- Your private student loan company may want to sue you personally for repayment of your student loans. Any co-signers on your loans, including parents or guardians, will also be subject to the lawsuit.
- If your lender gets a court judgment against you for default, they may be able to seize your assets or the assets of your co-signer.
Federal student loan default is just as severe as private student loan default, but you have the option to enroll in a loan rehabilitation program, which we cover in the next section.
Here’s a step-by-step account of what to expect once you default on your federal student loans.
- Your federal student loans are considered delinquent the first day your payment is late. After 90 days, your lender will report the delinquency to the three credit reporting agencies — Experian, Equifax and TransUnion. At that point, your credit score will start feeling the effects of your late payments.
- Once your loans are at least 270 days late, they are typically considered in default.
- You could begin receiving follow-up letters and phone calls regarding your student loans at any point between delinquency and default. Your account may be transferred to a collections agency, which will likely request you enter a voluntary repayment agreement.
- Once you’re in default, the entire unpaid balance of your loan (plus interest) could become due immediately through a process called “acceleration.”
- You no longer qualify for deferment or forbearance, and may lose eligibility for other benefits like loan forgiveness programs.
- You lose eligibility for other types of federal student aid.
- Since the default is reported to the three credit reporting agencies, your credit score will take a hit. With a lower credit score and a default on your credit report, you may not be able to buy a home or get a credit card.
- Your tax refunds and any federal benefits payments you receive may be withheld and applied to your defaulted loan.
- The wages you earn in your job will likely be garnished, which means your employer will withhold some of your wages to help satisfy your defaulted loan.
- Your loan servicer will likely take you to court, which could result in court costs, attorney fees, collection fees, and other court-related expenses.
- You may lose your ability to buy or sell real estate.
- Your school has the right to withhold your academic transcript until your loan is satisfied.
Once your loan is in default — and any of the issues above have begun to rear their ugly head — you have several options that can help you recover. One way to get federal student loans out of default right away is to pay your loan balance in full, although that’s not a feasible option for the vast majority of students.
In the next section, we’ll cover the steps you can take to rebound from default — whether you have private student loans or federal loans.
If you’ve defaulted on a private student loan and hope to remedy the situation, you should know that several options may be available to you depending on your loan provider. Here are the steps you should take right away once you’re ready to recover from student loan default.
- Call your loan servicer and provider. Whether you’re a graduate who defaulted on a private student loan or a parent who co-signed, your first step out of default is calling your loan servicer and loan provider (which may not be the same). Your loan servicer may be willing to work with you to come up with a repayment plan that can put you back on track and help you pay off your loans, but you won’t know unless you call and speak with them. Explain your situation as openly and honestly as you can, then ask for help.
- Set up a repayment plan. If your loan servicer is willing to work with you, it’s possible you could qualify for an extended repayment plan, a grace period, a payment extension, or even a reduced payment amount. Some private lenders may also offer a hardship exemption with a temporary reduction in interest rate and reduced payment. Keep in mind, it all depends on your loan servicer and the programs they offer, if any.
- Refinance your private student loans. If your loan servicer won’t offer any assistance, it may be possible to refinance your private student loans again, provided you can find a co-signer with good credit. Keep in mind, however, that whoever co-signs for your new loan will be jointly responsible for its repayment.
- Know your rights. While federal student loans have no statute of limitations that limit the time frame in which the state can try to collect, rules for the collection of private student loans vary from state to state. Depending on the state in which you live, your private student loan lender may be unable to pursue you for unpaid student loans at a certain point. The number of years it takes for your private student loans to surpass the statute of limitations for collections depends on when your contract was broken and the state you live in. Generally speaking, your loans may be uncollectable anywhere from two to 10 years after they go into default.
If your federal loans are in default, you have access to a handful of options administered through the federal government. To get out of default as quickly as you can — and with minimal damage to your credit and personal finances — consider these solutions:
Loan Rehabilitation is a federally sponsored program that can help students and graduates with certain types of student loans dig their way out of default. This program is available to individuals who have loans in the William D. Ford Federal Direct Loan Program or the Family Federal Education Loan (FFEL) Program. You may also be able to rehabilitate Federal Perkins Loans, although the program will vary slightly since these programs are offered through your school.
To qualify for federal loan rehabilitation, you must:
- Have loans in default that qualify for the program
- Agree in writing to make nine voluntary, reasonable, and affordable monthly payments within 20 days of each consecutive due date
- Make all agreed-upon payments during the 10-month period loan rehabilitation takes place
Generally speaking, your lender will base your temporary payment for loan rehabilitation on 15 percent of your discretionary income — a term used to describe the difference between your income and 150 percent of the federal poverty limit based on your family size and state of residence. To reach this point, you’ll need to submit pay stubs and other documentation to verify your income.
If you’re in loan rehabilitation for Federal Perkins Loans, on the other hand, your school will determine your monthly payment during the program.
If you can’t afford the payment plan your lender suggests, you can also ask for an alternative plan based on your monthly income and expenses. Depending on your income and expenses, your monthly payment under loan rehabilitation could be as low as $5 per month, notes the U.S. Department of Education.
Once you have made your nine required monthly payments under the program, your loan is no longer in default.
Pros of loan rehabilitation:
- You can get your federal student loans out of default in 10 months.
- Your new payment, which will be based on 15 percent of your discretionary income, may actually be affordable.
- Once you’re out of student loan default, you can qualify for other federal programs such as income-driven repayment, deferment, or forbearance.
- Once your loan is out of default, the default will be removed from your credit history.
Cons of loan rehabilitation:
- According to the U.S. Department of Education, your loan servicer may continue to garnish your wages or intercept your tax refund, even after you’ve entered the loan rehabilitation program and started making payments.
- Loan rehabilitation is a one-time deal. If you default on your loans after completing loan rehabilitation, you will no longer be eligible for the program.
- Even though the history of default will be removed from your credit history, your late payments on your student loans will remain on your credit report and damage your score.
Direct Consolidation Loan is another program that helps students get their federal student loans out of default and back into good standing. This program allows you to pay off certain federal loans with a new consolidation loan.
To qualify for a Direct Consolidation Loan with defaulted loans, you must complete one of the following steps:
- Agree to repay the new Direct Consolidation Loan under an income-driven repayment plan such as the Pay As You Earn Repayment Plan (PAYE Plan) or the Income-Based Repayment Plan (IBR Plan).
- Make three voluntary, on-time, consecutive full monthly payments on the defaulted loan before you consolidate with a Direct Consolidation Loan.
There are a handful of special considerations to take into account before you choose this option, including:
- If you want to consolidate another Direct Consolidation Loan in default into a new Direct Consolidation Loan, you must meet one of the two requirements above and consolidate at least one other eligible loan in the process.
- You can only consolidate a defaulted FFEL Consolidation Loan by itself (without any other loans included) if you agree to repay your loans under an income-driven repayment plan after the process is complete.
- If you want to consolidate a loan that is currently being repaid through wage garnishment or a court order against you, you must get the wage garnishment or court order lifted before you can proceed with a Direct Consolidation Loan.
- If you’re a parent who wants to consolidate a defaulted PLUS loan, the only income-driven plan you can choose is the Income-Contingent Repayment Plan (ICR Plan).
Lastly, it’s important to note that your path out of default becomes simpler if you choose to make three full payments on your defaulted loans to qualify for a Direct Consolidation Loan. Once you choose this option and make all three agreed-upon payments in full, you can choose to repay your Direct Consolidation Loan under any repayment plan you’re eligible for.
Pros of a Direct Consolidation Loan:
- Once your Direct Consolidation Loan is in place, you’ll become eligible for federal benefits like deferment, forbearance, and loan forgiveness programs.
- You’ll once again become eligible for federal financial aid, provided you qualify.
- You can get your student loans out of default immediately (if you agree to repay your Direct Consolidation Loan with an income-driven repayment plan) or after three months if you choose to make three full monthly payments before you consolidate.
Cons of a Direct Consolidation Loan:
- Unlike loan rehabilitation, consolidating your loans won’t remove the default from your credit report.
- Making three full monthly payments on your loan may be a hardship if you were already in default because you couldn’t afford to pay.
- If you choose to repay your Direct Consolidation Loan under an income-driven repayment plan, you will need to make payments on your student loans for 20 to 25 years.
While Direct Consolidation Loans and Loan Rehabilitation are the two most likely options for someone trying to get their federal student loans out of default, there is a third option that may be feasible for students in certain situations.
Student loan advocate Adam S. Minsky, an attorney whose law practice is devoted entirely to helping students with their student loans, points out that, in certain cases, federal student loans can be canceled altogether. As Minsky notes, circumstances where cancellation of your loans may be possible can include:
- Total and permanent disability of the borrower
- Death of the borrower
- School closure
- Disqualifying status, which can take place if a “school accepted a borrower to a program when there was a known issue that would prevent the borrower from legally getting a job in their field of training,” Minsky says.
- False certification, which happens “when a school accepted a borrower with no high school diploma or GED and didn’t provide an appropriate exam to test the borrower’s ability to benefit from the program,” Minsky explains
- False certification, or when a school official forges a loan-related document
- Identity theft
- Defense of Repayment, which happens when “a school engaged in misrepresentations of other unfair and deceptive actions that harmed the borrower or violated state law,” Minsky says (Note: Minsky notes that this is a new program that is a bit in limbo since Donald Trump took office and that issues are presently being litigated)
It may also be possible to have your student loans discharged or canceled due to bankruptcy, although the circumstances where this could work are very rare. According to the U.S. Department of Education, your federal student loans may only be discharged in bankruptcy if you file an action known as an adversary proceeding that requests the bankruptcy court find repayment would place an undue hardship on you or your family.
Keep in mind, however, that it’s very difficult to get a court to discharge your loans altogether, and that your student loan servicer will likely be present to challenge your request. In the likely event that you lose your case, you will still be required to pay the full freight of your student loan balance plus interest and fees.
While it’s possible to get your loans out of default after the fact, the best way to protect your credit and pay off your loans is to prevent default in the first place. If you’re afraid you’ll be late on your student loans, are already in delinquency, or are a few months late and on your way to default, it’s smart to take steps now to avoid a tricky situation.
Consider these possible strategies before you default on your private or federal student loans:
- Contact your lender right away. The U.S. Department of Education recommends notifying your lender and loan servicer any time you’re delinquent or struggling to make your student loan payments. If you have a federal student loan from the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, immediately contact your loan servicer. If you have Federal Perkins Loans, immediately contact the organization that handles the billing and servicing of your loan, which could be your school.
- Consider switching repayment plans to secure a lower monthly payment you can afford. Keep in mind that an extended repayment plan can help you pay a lower payment for up to 25 years.
- Sign up for an income-driven repayment plan. These plans let you pay a small percentage of your discretionary income for 20 to 25 years before resulting in complete forgiveness of your loans.
- Change your payment due date. If one of your biggest struggles is your payment due date, the U.S. Department of Education says you may be able to change it. Call your loan servicer and ask if you can move your date to the end of the month or whichever part of the month aligns with payday.
- Sign up for deferment or forbearance. Under certain circumstances, you may be able to qualify for a deferment or forbearance that lets you postpone federal student loan payments or reduce your monthly payment. While you may be able to avoid interest on certain federal loans with deferment, you’ll pay interest on all loans if you sign up for forbearance instead. Keep in mind that you’ll need to submit a request to your loan servicer to qualify for deferment or forbearance, and that you need to continue making payments on your loans until your request is granted. “If you stop paying and your deferment or forbearance is not approved, your loan will become delinquent and you may default on your loan,” notes studentaid.ed.gov.
- Get a Direct Consolidation Loan. The federal government suggests considering a Direct Consolidation Loan if you believe simplifying your loans may help you stay on track. These consolidation loans use the weighted average of your current interest rates to set your new rate, so they may not save you money. You can, however, choose a longer repayment plan to lower your monthly payment. You may also benefit from having a single monthly payment to make instead of several payments to juggle.
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