Student loans are a great way to tackle the rise in tuition costs. You can choose between a federal student loan or a private student loan. It is advised to first exhaust yourself of your federal student loan options as they come with a number of benefits that come in handy to help prevent letting your loan fall into default.
Student loan default has a number of serious consequences here is an in-depth overview of what one could expect when they default on their federal student loan
Table of contents
- What is default and when does it occur
- Consequences of Federal Student Loan Default
- How do I avoid federal student loan default
What is default and when does it occur?
Increased family size or reduced income or failing to keep track of the due date of loan payment may push to avoid paying your loan on time. If this continues then you will land up defaulting your student loan. Continued delinquency may also lead to your loan going into default.
For a loan made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, you’re considered to be in default if you don’t make your scheduled student loan payments for at least 270 days.
Consequences of Federal Student Loan Default
If you default on your federal student loan, here are the consequences you have to face:
Placing Your Loan with the Private Collection Agency: If you default on your federal student loan, the entire balance of the loan (principal and interest) becomes immediately due. Your loan holder may place your loan with a collection agency. In such cases, you will not be allowed to go for deferment or forbearance options or to switch repayment plans
Withholding money from your Tax Refunds and other Federal Payments(Treasury Offset): Federal law related to the collection of debts owed to the government requires ED to request that the U.S. Department of the Treasury withhold money from your federal income tax refunds, Social Security payments (including Social Security disability benefits), and other federal payments to be applied toward repayment of your defaulted federal student loan. This withholding is called the Treasury offset.
In the case of Defaulting FFEL Program Loan, your state tax refunds may be withheld and you may also lose your driver's license or other state-issued licenses.
Garnishing money from your wages: If you have defaulted on your Federal Student Loan and further don't make any arrangements to repay your loan then your loan servicer can order your employer to withhold 15 percent of your disposable pay to collect your defaulted debt. This Garnsihment continues your defaulted loan is completely repaid or removed from default.
Paying more: If your loan is transferred toa Collection agency then the private collection agency earn a commission for any payment on loans the ED has referred for collection. The cost of placing your loan with a collection agency is usually the largest collection cost you may face if you default.
There are other collection costs, such as Treasury Offset processing fees and costs associated with potential civil litigation from the Department of Justice.
How do I avoid federal student loan default?
Here are the 8 ways you can avoid federal student loan default
1) Deferment or Forbearance
Temporary Relaxation from loan payment is achieved by deferment or forbearance. These two become appropriate options when you are in a short term financial bind. Opting for deferment or forbearance can only relieve you for a short period of time from loan payment. However, during this period you are expected to continue paying the interest accrued.
You may be able to defer your federal loans for up to three years. If you don’t qualify for a deferment, you may be eligible for forbearance, that can suspend or reduce your payments for up to 12 months. Your lender can make decisions to approve or to deny your general forbearance request. Your forbearance request might be approved based on instances of medical expenses and financial hardship. In other cases, you may be eligible for mandatory forbearance if you meet certain eligibility requirements.
The Borrowers must have to continue to make payments until their request for deferment and forbearance are approved. During forbearance, you are responsible for paying the interest that accrues on all types of federal student loans. However, you may not be responsible for paying the interest that accrues on certain types of loans during the deferment period, so make sure you understand how your specific situation works.
NOTE: If you’re pursuing loan forgiveness, any period of deferment or forbearance likely will not count toward your forgiveness requirements. This means you’ll stop making progress toward forgiveness until you resume repayment.
2) Go for Consolidation
If you have more than one Federal Student Loan and you are uncomfortable with managing those loans separately, you can choose to go with Loan Consolidation. It combines multiple federal loans into a single federal loan through the Department of Education. Federal Student Loan Consolidation may help you become eligible for some federal loan repayment programs. However, it won’t lower your interest rate. It may only lower your payments by extending them. Federal loan consolidation doesn’t have a credit requirement, and it offers the benefit of a single loan bill and potentially lower payments.
3) Income-Driven Payment Plans
Apply for an Income-Driven Repayment Plan. An income-driven repayment (IDR) plan can make your payments more affordable because they are based on your income. Under an IDR plan, payments may be as low as $0 per month. Your monthly payments can be estimated using the Repayment Estimator. After you apply, your federal loan servicer will notify you regarding your eligibility and, if you qualify, the payment amount.
4) Borrow only for the need
Estimating and borrowing the correct amount of loan is very essential. Borrowing a larger amount of money may lead to an increased burden on repayment. So borrow only what you need to pay for your college expenses.
Get proper knowledge about the risks involved in borrowing and repaying huge loans by completing Financial Awareness Counseling.
Making a budget and find how much you actually need to borrow.
You can request the School’s Financial Office to reduce the loan amount even if you are eligible for borrowing a higher amount of loan.
5) Track your loans online
There are chances of forgetting the due date for loan repayment, and over a longer period this may end up in defaulting your Student Loan. So keep a regular track of your loans and their maintenance. This may help you make all your repayments on time.
Find information about all of your federal student loans from the U.S. Department of Education by logging in to "My Federal Student Aid."
6) Keep good records
Keep the following important documents in an organized file:
Financial aid offers
Loan counseling materials (entrance counseling and exit counseling)
Your promissory note(s)
Amount(s) of all student loans you borrow
Account number for each student loan you receive
Loan servicer contact information
Record of your monthly payments
Notes about any questions you ask about your student loan, the answers, and the name of the person to whom you spoke
Deferment or forbearance paperwork and notes of any phone calls to the loan servicer
Documentation that you paid your loan in full.
7) Know in detail about Your Loan and Loan agreement
It is necessary to have clear knowledge about the type of loan that you are receiving. You have to understand the cost of getting the loan, the interest rate, and the repayment terms for the loan.
Make sure that you have read and understood the terms before signing the promissory note. An important note to be remembered is that you need to repay all your Student Loans, even if you don’t complete your education.
8) Inform Loan Servicer
To avoid default on your student loan notify your loan servicer if you are going through the following situations,
You need some help or relief from making your monthly payments
If you graduate
While you withdraw from a school
Join another school
drop below half-time enrollment status at school
change your personal details such as name, address, or Social Security number;
experience a change in your life that might impact your loan payments.
It is advised to be well aware of all your student loan repayment options so that you can avoid falling into default. Once defaulted it leaves a mark on your credit history, this can hamper your credibility as a borrower.