What is student loan default?

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Student loan default happens when borrowers fail to pay their student loans according to the loan terms. Whether we like it or not, a wide range of life circumstances can make it difficult to keep up with monthly student loan payments, and not everyone can just refinance their loans to get a better deal.

Recent figures from the U.S. Department of Education show that, on a national level, the student loan default rate is around 10 percent. Of course, there’s a big difference between paying a few days late and letting your student loans go completely. Where a late payment may be easier to overcome, true default comes with consequences that can last for years.

How does student loan default work?

When you fail to make a payment on your student loan before or on the day that payment is due, your loan moves into delinquent status. At that point, your student loan will remain delinquent until you pay the amount you owe, you qualify for deferment or forbearance or you change your repayment plan.

Once your student loan payment is at least 90 days late, your loan servicer will report your delinquency to the three credit bureaus — Experian, Equifax and TransUnion.

At that point, your loan will transition from delinquency to default on a different timeline depending on the type of student loans you have.

  • With federal student loans, your loan is usually considered in default when you don’t make your scheduled payments for 270 days. One exception is with Perkins Loans, which can be considered in default if you miss a single payment.
  • With private student loans, you are usually considered in default after you miss three monthly payments, or 120 days total.

How do I know that my student loans are in default?

If your student loans become delinquent or past due, you will likely be notified by your loan company or servicer of this fact. You may receive a notice in the mail or an email with details on your late payment, but it could depend on the process you normally use to pay your student loan bill.

If you let your student loan payments become several months past due, then you should anticipate them being in default in the near future. Once your student loans are in default, you should see them listed on your credit reports, which you can see for free from all three credit bureaus using the website AnnualCreditReport.com.

You can also log into Studentaid.gov to see your status on federal student loans, including any information on past due, delinquent or defaulted amounts.

How does default affect me?

There are many consequences that can arise from letting your student loans go into default, and the damage can take years to repair.

Here are some examples of why you should avoid student loan default at all costs:

  • With federal student loans, defaulting can lead to the entire unpaid balance of your loan and any interest you owe becoming immediately due through a process called “acceleration.”
  • When you default on federal student loans, you are no longer eligible for deferment or forbearance, nor can you change your repayment plan at that point.
  • Federal student aid is not available to students who default on their loans.
  • With federal or private loans, your loan holder can take you to court.
  • Your wages could be garnished.
  • Your default will be reported to the credit bureaus, which can lead to considerable damage to your credit score.
  • Late fees and interest will continue to accrue on your debts, meaning the problem only gets worse.
  • You will likely be on the hook for court costs, collection fees, attorney fees and additional costs associated with the collection process.
  • Your school could withhold your academic transcript until you get your student loans out of default.

What happens if I default on my student loans?

If you default on your student loans and never take steps to turn your situation around, all of the consequences listed above can eventually come to fruition. Unfortunately, the results of this financial misstep can impact your life in myriad ways.

If you have poor credit due to defaulting on your student loans, for example, you may not be able to qualify for a credit card, borrow money to purchase a car or take out a mortgage to buy a home, regardless of your income.

If you are able to get approved for consumer credit, you could also wind up paying a higher interest rate and more fees than someone whose credit score is in good standing.

Additional consequences of defaulting on your student loans could include difficulty in signing up for utilities or qualifying for reasonable homeowners insurance rates. You might even have trouble getting a cellphone plan or qualifying to rent your own place.

How do I get my student loans out of default?

If you’re struggling with federal student loans in default or soon will be, you should know that the federal government has temporary protections in place due to COVID-19. Specifically, collection activity is currently on hold for defaulted federally owned student loans or grant overpayments. Interest on student loans is also temporarily set at 0 percent on defaulted federal loans. This temporary relief is set to expire on Sept. 30, 2020.

According to the U.S. Department of Education, there are three main ways to get your federal student loans out of default: paying your entire loan balance in full, pursuing loan rehabilitation or applying for loan consolidation. Since most people cannot afford to pay their loans off in one big chunk, rehabilitation and consolidation are the only options most can consider.

With federal loan rehabilitation, you start by contacting your loan servicer. When you rehabilitate a federal loan through the FFEL Program loan, you must:

  • Make nine affordable monthly payments (as determined by your loan holder) within 20 days of the due date and agree to these terms in writing.
  • Make all nine of the agreed-upon payments during a period of 10 consecutive months.

The monthly payment you make under loan rehabilitation is typically equal to 15 percent of your monthly discretionary income. According to the U.S. Department of Education, discretionary income is “the amount of your adjusted gross income (from your most recent federal income tax return) that exceeds 150 percent of the poverty guideline amount for your state and family size.”

Because of the way loan rehabilitation payments are determined, your loan amount during the rehabilitation process could be as low as $5 per month.

With federal loan consolidation, you get the chance to combine your existing federal student loans into one new one. To qualify for this plan for defaulted loans, you must do one of the following:

  • Repay your new Direct Consolidation Loan under an income-driven repayment plan.
  • Make three consecutive, voluntary, on-time, full monthly payments on the loan in default before the consolidation takes place.

Keep in mind that the rules are different for private student loans. If you have private student loans in default, you may be able to negotiate a settlement on your debt in collections. You could also try to work with your loan company to get back up to date, which you can facilitate by reaching out and explaining your situation.

Many individuals with private student loan debt they cannot manage also wind up reaching out to a student loan lawyer for help.

Next steps

Once you have taken steps to get your student loans out of default, it’s important to avoid making the same mistakes again. Your best move is making sure that you have a monthly payment that you can afford without financial hardship.

You can do this by:

  • Looking into income-driven repayment plans that let you pay a percentage of your discretionary income on your loans for 20 to 25 years.
  • Refinancing your student loans with a private lender in order to secure a lower interest rate and a more affordable payment.
  • Choosing among federal student loan repayment plans (for existing federal loans), which may let you repay your loans for up to 30 years.

Also make sure that you set yourself up for success when it comes to planning for your student loan payments. This can mean starting a monthly budget that helps you plan for each of your bills and your average expenses, but it can also mean cutting discretionary spending so you have more wiggle room in your budget each month. Finally, you can also consider setting up your student loan payments to be sent in automatically so you never forget to pay.

Questions to consider

Can I dispute student loans after 7 years?

While it’s possible to dispute incorrect details on your credit reports and have the information removed, negative marks based on unpaid student loans will remain on your reports for at least seven years. Student loans are notoriously difficult to discharge in bankruptcy, and disputing them on your credit reports is not going to help, either.

Your best bet is making sure that your payment is affordable and paying what you owe, no matter how long it takes. However, you should keep in mind that some student loan forgiveness programs can help you wipe away your debt sooner rather than later.

What happens if I cannot repay student loans?

If you cannot repay your student loans at the moment, you may want to look into federal deferment and forbearance. Both let you pause your student loan payments while you get back on your feet. Interest may still accrue during this time, but either type of relief can buy you time.

Can you go to jail for student loan default?

Generally speaking, you cannot go to jail for defaulting on your student loans. However, your lender can and likely will sue you, your credit score could take a significant hit, your wages could be garnished and you could wind up owing a lot more in fees and interest over the long run.

Featured image by David Pereiras of Shutterstock.

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