Defaulting on student loans can be daunting because of the consequences that come with it. Fortunately, student loan defaults have been declining over the past decade, according to the College Board. However, it is important for all borrowers to know what student loan default means and how to avoid it. Read on to learn more about student loan defaults and how to avoid them!
What is Student Loan Default?
A student loan default occurs when you fail to make payments according to the terms agreed in the promissory note. According to the US Department of Education, federal loans become due after 270 days of no payment. Private student loans vary in time frame, so familiarize yourself with the details of your loan. Some may default once they miss a payment. However, most private loans enter default after 120 days of no payment.
Student Loan Default vs. Default Delinquency
If you have heard of student loan default, you have probably heard of student loan delinquency. Often, people use these terms together, but they have different meanings. As mentioned earlier, a student loan default occurs when you are months behind on repayments.
Student loan delinquency typically occurs one day after a repayment is missed. You’ll remain in delinquency until you make the late payment. Other ways to get out of default include changing your payment schedule or entering forbearance or deferment.
For federal loans, after 90 days of delinquency, the lender reports to the credit bureaus. This affects your credit score for up to seven years. Private lenders will also notify you but may have different time-frames. Remember that if you continue to be delinquent, you’ll enter default.
Student Loan Default Consequences
Student loan defaults will remain on your credit score for up to seven years after the amount is repaid. It can take years for a declining credit rating to recover. This is not the only consequence of student loan defaults.
Failure to repay federal student loans nullifies your entitlement to forbearance, deferment, repayment schedules, and student loan forgiveness. Late payment also eliminates your eligibility for future federal student loans. However, there are other consequences of defaulting on a federal student loan:
- The loan balance is accelerated, which means that the entire balance is due immediately.
- Wages could be garnished, meaning your employer could be forced to withhold some of your income and send it to your lender.
- The lender can take you to court and you will bear all costs related to the proceedings.
- The school you attended can withhold your transcript until the deficiency is resolved.
- You may not be eligible to join the military if you default on your student loan.
- Social security payments and tax returns can be intercepted.
- The lender can assign your loan to a collection agency. This is an entity that collects unpaid debts. You are responsible for paying all costs associated with collection.
Federal student loans have more severe consequences in the event of default, as the government offers many preventative options. Private lenders can’t garnish your wages without a trial. However, if the private lender wins the decision, they can garnish your wages. Each private lender may have different consequences.
How Can I Avoid Student Loan Default
As you can see, it is important to take steps to avoid defaulting on student loans. Once you feel like you’re about to default, you need to weigh your options. For federal student loans, you can request a deferral or forbearance, which allows you to legally delay your payments. Another way to avoid defaulting on a federal loan is to apply for an income-based repayment plan.
These plans are based on your monthly income, which makes your payments more affordable. Additionally, you must use the 270-day grace period before the default to create a repayment plan. Also, there are more general ways to avoid student loan defaults for private and federal loans:
- Borrow carefully.
- Know the details of all your loans such as lender, interest rate, amount, and payment schedule.
- Pay on time as often as possible.
- Refinance or consolidate loans to get a lower interest rate and/or make fewer individual repayments.
- Finally, make sure you contact your lender or loan officer for any issues or changes that may disrupt your loan repayments.
Defaults on student loans and their consequences can be a source of concern for students and graduates. There are plenty of ways to avoid student loan defaults, as long as you keep an eye on your finances and payments. Remember that if you feel you need help, ask for it!
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