The word ‘Default’ means failure to fulfill an obligation. Financially it means failure to repay the loan on the due date.
Student loan default is a matter of major concern as it has a long term severe impact on your professional as well as personal life. Before you begin applying for student loans, it is not only advisable but also wise to be aware of the consequences of non-repayment and how they can be tackled. You must also study the measures as to how to avoid getting into default and what are the strategies to deal with default and their pros and cons.
If you have defaulted on your student loan that means you have failed to repay as per the terms. It mainly is the result of non-payment of interest for too long and has not taken any action to avoid it or deal with it.
Table of Contents
- How does a Loan go into Default?
- Consequences of Defaulting on your Loans
- How to Handle Defaulted Loans?
- Deferment or Forbearance?
- Alternatives to Handle Defaulted Student Loans
- Avoid getting into Default
- Defaulting Private Student Loan
- Consequences of Defaulting on Private Student Loans
- Handling Private Loan Default
- The Benefit of Statute of Limitation
How does a Loan get into Default?
If you miss repaying the interest on the due date even by one day the loan becomes ‘delinquent’. If you miss just one monthly payment and start making payments, the account will still remain delinquent until the respective payment is made.
Once delinquent you can either go about fixing this immediately or if the borrower continues to miss payments there are chances of falling into default. Now, a default can happen with the first payment or even in a few months it all depends on your lender, loan terms and the state or federal laws.
If you've defaulted on your loans you need not worry, as per reports provided by the Department of Education 11.5% of students who began making payments towards their federal student loans had defaulted within two years. Here is a rough outline of how a borrower can fall into default. Remember the 270 days mentioned is not a fixed number. It depends on the lender, loan term and the state or federal laws.
Non-payment of loan → Delinquency → exceeds 270 days → Default
Learn more about student loan repayment
Consequences of Defaulting on your Loans
Going into default is not a good sign and has a long time consequence. It not only damages your credit score but also affects working life in the following ways:
Garnishment of your wages, tax refund and Social Security benefits
Loss of eligibility for deferment, forbearance and other repayment plans
Loss of eligibility for future federal financial aid
Demand for immediate repayment of your balance and interest
Preventing you from buying or selling real estate
Taking you to court and charging you for any costs that come with the collection process
The credit score will be remarked negatively for 7 years.
Beyond financial and professional life it also impacts personal life emotionally:
Creates a sense of disappointment due to failure of payment
Ruined relationship with cosigner as it affects their credit score as well
Relationship stress with a spouse as well as with parents
It affects mental stability due to stress
How to Handle Defaulted Loans?
There are two options that you can consider when trying to handle student loans that are in default -
The literal meaning of deferment is the action or fact of putting something off to a later time or postpone. So it means postponing the payment of the interest up to a certain period.
Under forbearance, your loan payments are postponed (or reduced) but interest continues to accrue during the period of forbearance. If you don't pay the interest during that period, the interest may be “capitalized,” which means it is added to your principal balance.
The difference between Deferment and Forbearance
Deferment and forbearance both postpone student loan payments when you can’t afford them. The major difference is that forbearance always increases the amount you owe, while deferment is interest-free for certain types of federal loans.
The following table shows the loans that require and don’t require to pay the interest during deferment
|Loans with no interest during deferment||Loans with interest during deferment|
|Direct Subsidized Loans||Direct Unsubsidized Loans|
|Subsidized Federal Stafford Loans||Unsubsidized Federal Stafford Loans|
|The subsidized portion of Direct Consolidation Loans||Federal Family Education Loan (FFEL) PLUS Loans|
|Length varies by deferment type, some are permitted up to three years or as long as qualified.||Usually not more than 12 months.|
Now that you know the difference between deferment and forbearance, you have to choose between the two carefully. You will have to pick between the two based on which is suited for your current financial condition. It is advised to meet an expert or speak to your servicer before making a decision.
DEFERMENT OR FORBEARANCE?
These options are usually easily available if you hold Federal Direct Loans. If you hold Private Loan it is not easy to get approved of this benefit.
There are certain criteria to be eligible for Deferment if the borrower is:
Attending school at least half time
Earning a monthly income of less than 150% of the state’s poverty guidelines
Being an active member of the military or Peace Corps
Receiving state or federal assistance
Student loan deferment is more beneficial as it is a break from the loan payment burden. As these loans don’t accrue interest during a deferment, so the amount you owe the ends will be the same.
If you do not qualify for deferment and hope to have temporary financial challenges, then forbearance could be of a rescue plan. But is not very advisable.
Other Options to Handle Defaulted Student Loans
Before you make a final decision, it is always better to look into the other options available to manage your debts and avoid any future chaos and problems. The other strategies to consider are:
1. Income-driven repayment plan
It allows you to pay as you earn. These plans adjust your monthly payment to 10%, 15% or 20% of your income.
2. Extended repayment
It reduces the monthly payment but extends the repayment period up to 25 years.
3. Graduated repayment
It reduces the monthly payment but increases them throughout the period of 10 years.
4. Loan rehabilitation
Under federal guidelines you need to make 9 months payment within 20 days of the due date during the period of 10 consecutive months, this will make your loan fall out of default and the government brings it back into good standing.
5. Loan consolidation
Consolidations mean combining into one whole. This allows you to consolidate your multiple federal education loans into one loan resulting in the payment of one single loan instead of multiple.
Avoid getting your student loans into Default
There are measures that must be taken into consideration before opting for a student loan. These are certain precautionary measures to avoid getting into default in the first place. Those measures are:
Borrow as much as required only. Default rates increase with over-borrowing
Hence borrow only as much as you're capable to pay considering your income and other expenses
Understand and realize your responsibilities and options before applying for a loan
If you face temporary financial difficulties it would be advisable to ask your lender about options like deferment or forbearance or any other options before you go into default
If you are having trouble making payments due to low income you may ask your lender about modified repayment options, such as income-driven repayment, extended repayment, graduated repayment, income-sensitive repayment and so on
Consider using a consolidation loan to combine all your educational loans into one big loan to get the benefit of average interest
Prepare a checklist of all your loans and their important details like name and phone number of the lender
Have a record of the type of loan, the amount of the loan, the interest rate and especially any due dates and deadlines
Inform the lender if any changes may affect the loan repayment such as change of address, graduation, termination, of course, absence and transfers to another school
If you have both federal and private educational loans and can afford to make payment of only one loan, avoid defaulting on federal loans as they have flexible repayment options but harsher penalties for default
Last precautionary but the most important of all is “make payments on time”
This was all about Federal Student Loan Deferment. Now let us talk about how to deal with private student loan default. Private student loan default is more troublesome than federal student loans. Let us read more about it.
Defaulting on a Private Student Loan
There are different conditions for a private student loan to get into default which differs from loan lender to lender. These criteria are mentioned in the agreement which the student has to carefully read and be aware of. In some cases, the provider declares the loan as default after 3 months of non-payment and in some cases, it gets default right after the first month of non-payment.
Not only this but also the private loan holders do not enjoy many benefits like that of federal student loans like the option of deferment, forbearance extended, graduated repayment and so on. But, in some cases, the borrower may enjoy these benefits depending on the service provider. Some service providers may provide deferment or forbearance or other options whereas some may not. These options totally depend upon the service provider and the agreement signed by the student on reading.
Other than non-payment what are the other factors for the Private Loan to get into default?
There are a few reasons as to why the private loan gets default like:
If Cosigner gets bankruptcy
If cosigner dies
You file for bankruptcy
Default on another debt
These factors again depend upon the agreement with the service provider.
Consequences of Defaulting on Private Student Loans
The consequences are similar to that of federal student loan but also differ in many ways depending on the contract like:
The lender may ask for immediate full payment
The lender will start approaching the cosigner for the repayment even if one payment is missed to avoid getting into default. Even if the cosigner makes the payment, the borrower is still liable for the debt
The lender may refer the borrower’s account to a debt collector causing frequent collection calls and letters pressuring the borrower to make payments. These actions can cause a lot of pressure to the borrower affecting his professional and personal life
The credit score will be remarked negatively for 7 years
It also hits the cosigner’s credit score
Bear the additional expense of collection fees which will increase the loan by 25% to 40%
The service provider can file a lawsuit against the student, the lender may also seize assets of the provider
Garnishment of your wages up to 25%
Seizure of tax refunds and Social Security benefits
Private student loans are almost impossible to discharge in bankruptcy
Handling Private Loan Default
Like mentioned earlier private loan agreements differ from loan lenders to lender and so do the terms and conditions. Unlike Federal student loans, private loans do not have specifics measures or remedies to overcome non-payment. These options depend on the service provider and the contract signed.
But the good news is apart from the agreement there are some other measures too that can help you deal with default private loan, they are:
1. Request for some flexibility with repayment of the loan
If you find it difficult to pay as per the terms you can contact your loan provider to inquire about the other available repayment options. Some may offer forbearance to avoid private student loan defaults.
2. Request for refinancing the private loan
When you have multiple loans, one of the simplest and easily available options is refinancing, which gives the benefit of a low payment rate reducing the burden of high interest.
3. Handling strategy when your loan goes into collection
When your loan is handed over to Debt collector you can tackle this situation by debt settlement negotiation. In other words, negotiate the payment methods.
4. Use your rights as a borrower
Even though you have a defaulted loan you still have certain rights that the debt collector has to respect. The debt collector cannot indulge in illegal practice like activities like use of abusive and unfair tactics.For instance, no use of abusive words, not harming the person physically or torturing mentally or blackmailing. In some cases if you tell them not to contact in the late evenings and if they still continue doing so it is illegal. You can also use the benefit of the statute of limitations to protect yourself from older debts.
5. Check the debt collection request and verify
The debt collector has to provide proof that you are obligated to pay the debt immediately. After getting the notification from the debt collector you have 30 days to request for must full documents of the loan agreement.
Once you receive the validation, compare it with your records. If there is any variation you have the right to prove that the debt is invalid or not true regarding the amount collection against the actual amount payable or if the debt doesn't belong to you.
6. Hiring a student loan lawyer
In case of private student loan default, hiring a student loan lawyer becomes a necessity especially when you are being sued over the default loan. The lawyer can also issue a cease-and-desist letter to collection agencies to stop them from contacting you. The attorney can also explain if there are any state laws that may protect you.
The Benefit of Statute of Limitation
The one advantage that the private loan default enjoys is that of statute of limitation. According to which the lender cannot ask the borrower for repayment of the loan after a specified time period. For instance, the lender can ask the borrower to repay within 5 years, but if the lender fails to do so in those 5 years he is not eligible to ask for repay after those 5 years period. The time period differs from lender to lender.