Lenders inundate students with offers for student loans, but once your debt starts piling up, finding help can be tricky. According to the Department of Education, approximately 9 percent of student loan borrowers default within two years of starting loan repayment, as of 2010, the most recent data available. Borrowers with federal loans have deferment and forbearance programs and an array of repayment plans to help keep a loan from defaulting, but private loan holders may not have these options. Obviously, staying out of default is the preferable bet, but if you do get caught in it, here’s help on how to get out.
Steps before default
Federal student loans are considered “delinquent” immediately after missing a payment. After 90 days, delinquency gets reported to the three major credit bureaus and can lower your credit score. But delinquency isn’t the same as default. During delinquency, you’ll still have the ability to switch repayment plans or postpone payments through deferment or forbearance.
Be careful postponing, warns Jonathan Stroble, senior manager of external affairs for the Georgia Student Finance Commission.
“Even if you’re in (deferment or forbearance), interest may still accrue on that loan,” he says. “If you have the ability, then the student should probably pay that interest while they’re in that deferment status to prevent that interest from piling up.” The exception to this is with subsidized loans, wherein the government pays the interest during deferment.
Though federal loan borrowers are entitled to postpone payments for up to three years in deferment and up to one year in forbearance if they meet certain eligibility requirements, interest accrues fast and eventually will capitalize on unsubsidized loans. For instance, borrowers carrying $30,000 in loans at 6.8 percent interest who postpone payments for three years will wind up with a balance that’s more than $6,700 higher by the time deferment is over. If the interest capitalizes, they’ll pay an additional $3,168 (on top of the $6,700) over the lifetime of the loan.
Deferment and forbearance are automatically available to qualified federal loan borrowers, but private lenders are a different story. Because they are private loans, lenders aren’t required to offer deferment or forbearance programs, though many lenders have similar hardship programs.
Those who have federal loans may also have another option — income-driven repayment plans. For those who qualify, the government offers programs that cap monthly payments according to your paycheck.
Diving into default
Deferment and forbearance aren’t ideal, but they’re better than defaulting. Most federal loan borrowers with loans delinquent for 270 days or more will officially be in default, which means the entire loan balance with interest is due immediately. Once this happens, your credit score will dive even further, the government can withhold tax refunds, wages could be garnished, you may face legal action, and the cost of collections, court fees and attorney’s expenses can be added to the debt pile. You also won’t be eligible for deferment or forbearance.
Once you’re in default with federal loans, what can you do to get out?
Default doesn’t have to be the final step. You can get out of default by paying the debt in full, consolidating the loan with other loans that aren’t defaulted or by entering into a loan rehabilitation program.
If you want to try loan rehabilitation, the first step, says Leanne Cardwell, assistant commissioner of student loans for the Missouri Department of Higher Education, is to contact whoever holds your loan and make a payment arrangement. If you don’t know who holds the loan (it may not be your original lender), you can look it up in the National Student Loan Data System.
“If you set up payment arrangements and make those for nine payments within 10 months, then your loan can be eligible for loan rehabilitation,” Cardwell says.
With consolidation, the rules are a bit more lax. According to the financial aid site, Finaid.org, after making a payment arrangement, defaulted loans can usually be consolidated after three on-time payments. Those who qualify for Direct loan consolidation can pull their loan out of default immediately if they enroll in either the federal income-based or income-contingent repayment plan.
Once again, the terms differ for those with private student loans. Unfortunately, private loan borrowers may not have a 270-day window before default or the same rules on rehabilitation, says Karen McCarthy, policy analyst for the National Association of Student Financial Aid Administrators.
“A private loan might have completely different (default) rules that apply, and they may vary from one private loan to another,” she says. McCarthy adds that students should read their loans’ promissory notes carefully and have a clear understanding of the rules on default before taking on a private loan.
Regardless of whether you have federal or private loans, Cardwell warns students to watch out for predatory companies who promise to consolidate your loans or arrange a payment plan for a fee.
If you’re approached, “The No. 1 first thing I’d do would be look on the National Student Loan Data System to see if that person was the holder of my loan,” she says. “If they’re not, I’d call (the loan holder) and say ‘Do you know who this is that’s calling me?’ just to verify that it’s not someone trying to take advantage of you.”