Chances are if you’re reading this, you have student loans. If that’s so, then you are probably also worried about what happens if those loans go into, or have already gone into default. It is something to be worried about, but your best weapon against this scenario is going to be learning what going into default means, how you can avoid it, and learning about the 3 things that happen when you default on your loans. Below are the basics of student loan law, followed by what your options are if you are about to or have already defaulted.
#1: Your Entire Loan Becomes Due
Defaulting on a loan is when you fail to repay your loan as agreed, and usually happens when you miss many months of payments, though it can also happen if you violate your loan terms or obtained a student loan fraudulently. Once you have defaulted your ENTIRE loan becomes due, not just the payments you missed. If you owe $50,000 you are now expected to pay $50,000, in one installment. This is obviously very bad and in most cases impossible to pay, unless you’ve recently come into some money. This also means that you lose all benefits of the loan, meaning that if you want to return to school you will have to pay for it in cash, and you will no longer qualify for income based repayment plans, forbearance, and deferment from your lender. In many instances you will also start getting harassed by collectors, and if left undealt with for too long you can even be sued. This is definitely learning about student loan law the hard way, take charge before this happens!
#2 The Amount of Money You Owe Goes Up…A LOT
Once you go into default, you will be charged hefty collections fees by the lender that owns your loans, often adding thousands if not tens of thousands of dollars to your loan. If left unpaid and unchecked long enough, your lender may even sue you for the money, which in addition to the obvious heartache causes you to be charged legal fees on top of the principle and the collections fees. Even worse, interest keeps building up on the loan this entire time, and it can get extremely overwhelming very fast. If the government sues you for your defaulted loan, they can even seize your tax refunds or garnish your wages (which means taking the money they are owed out of your paycheck) to start getting their money back. It goes without saying that this is an awful situation to be in, which is why it’s important to avoid default. If you are already in default then the most important thing is to act fast so that interest and fees don’t keep building, and you can keep your income safe.
#3: It Ruins Your Credit
Every missed loan payment lowers your credit score, and once you default your lender will report you to the credit bureaus. This will further harm your credit, and it can take 7 years for these negative effects to go away, even if you rectify them immediately. In certain cases, such as Perkins loans, you may even be stuck with the negative credit effects until the entire loan is paid off. Having your credit ruined like this can make day-to-day life very difficult, as it can make it hard to rent or buy housing, get a car loan, open credit cards, and even make it impossible to get renter’s insurance. It is a very negative thing that should be avoided at all costs, because it is very hard to undo this harm to your credit. Oftentimes even bankruptcy won’t absolve you of your student loans.
The good news is that it may not be too late. If you haven’t defaulted yet, then do anything you can to make sure you don’t default. If you missed a payment or two you are Delinquent, which while still bad for your credit is not nearly as severe as defaulting, which takes many months of non-payment to go into effect. If this is you then start repaying your loans as soon as you can. If you cannot afford your loans, then you can speak to your lender about income based repayment plans, which can sometimes bring your monthly payment as low as $10, or you can ask them about forbearance or deferment. In forbearance or deferment your lender will give you a grace period where you are not required to pay your loans. This grace period is usually 1 to 3 years. While income based repayment plans and forbearance are not ideal (since interest still builds while you are not paying) they are far better than going into default. So if you are about to go into default, the wisest thing to do is consult your lender about your options and start paying on your loans as soon as you can. If you are already in default, you still have a few options, and the most important thing to do is act quick. Consulting your lender may be a good idea, because they can tell you if they sold your loan to collections and what your options might be. Your best option is to pay the loan amount in full. Unfortunately this is usually impossible, as the reason you defaulted in the first place is because you can’t afford the loan payments. Another option may be settling with your loan provider, which still involves paying a lump sum, but it’s usually less than the total amount of your loan. Again, this one is usually hard or impossible to afford, but in rare cases may work. Otherwise your two options are student loan rehabilitation or student loan consolidation. Student loan consolidation involves bundling all your loans into a single, larger loan, so you only have one payment and one interest rate. If you have defaulted on some of your loans but not all of them, this is the best option. You can consolidate defaulted loans with non-defaulted ones, and in some cases this will even take the default off your credit rating. While it won’t entirely fix your credit it is a big step in the right direction. Student Loan Rehabilitation is a one-time deal that you can get from the government after you’ve defaulted on your federal loans, but only if you are able to make 9 months of payments on time. It will take the default off your credit and allow you to start paying your loans again at a low monthly rate you can afford. The downside to both options is there are extremely hefty fees, and can sometimes up the principle of your loan by 16%! This means that a $10,000 loan might turn into $11,600 due when you rehabilitate. That’s why it’s so important to avoid default in the first place, however sometimes rehabilitation or consolidation may be your only options to start fixing your credit. Of the two, consolidation is usually a better deal. Just remember that it isn’t too late, and the best thing you can do is start taking action right away! The longer those loans sit without getting paid the deeper the hole gets, so the most important thing to do is get moving in the right direction and paying those loans!