“Student loan default” might be about the scariest combination of words possible. More young people than ever are starting their careers with large amounts of student loan debt, and for some, figuring out how to make the required monthly payments can be a struggle.
Defaulting on your student loans can have serious consequences, but there are ways to avoid defaulting on your student loans or recover if your loans are currently in default. If you’re worried about student loan default, the most important thing you can do is educate yourself on what it is, and how to avoid it.
Student loan default is basically just a term for when you completely stop paying your student loans. You get a bill, hide it under the mattress, and go back to binging true crime TV—and that pattern repeats for several months until your student loan provider turns your debt over to a collection agency.
To get more technical, defaulting on your student loans is a process that takes place over a period of non-payment . When you first miss a payment, you loans are delinquent but not yet in default. At 90 days past due, your lender can report your missed payments to credit bureaus. And when you reach 270 days past due, your student loans are officially in default.
What Happens When Your Student Loans Default
1. Collection agencies come knocking.
If you default on your student loans, your lender will eventually turn the debt over to a collection agency. The collection agency will then attempt to recover the payment from you, typically bombarding you with frequent letters and phone calls. Collection agencies also attempt to determine what other assets, including bank accounts or property, that would allow you to pay your debt. On top of dealing with regular calls from debt collectors, you will also be responsible for paying any additional fees the collection agency charges on top of your student loan balance.
2. Loan Forgiveness and Forbearance Options are no Longer on the Table.
Student loan default on federal loans means that the federal government can revoke your access to programs that might make it easier for you to pay your loans, including loan forgiveness or forbearance. This means that even if you qualify for something like the Public Service Loan Forgiveness program, you could be rendered ineligible if you let your loans go into default.
3. Your Credit Score Might get Lower.
Once your student loans are in default, your lender or the collection agency will report your default to the three major credit reporting bureaus. This means that your credit score will take a major hit. A low credit score can make it harder for you to get a competitive interest rate when you need a car or home loan.
4. You Might Have to Give up Your Tax Refund, or a Portion of Your Wages.
If your lender or a collection agency can’t recover the amount owed from you, they can request that the federal government garnish your tax refund and even some of your income. For example, if you filed your taxes and were eligible for a refund, the government would instead take that refund money and apply it toward your defaulted student loan balance. On top of that, the government can garnish your wages, which means that they can take up to 15% of each paycheck to pay back your loans.
How to Get Student Loans out of Default
Just like you can’t ignore the check engine light for too long before you end up with smoke billowing out from under your hood, ignoring student loans in default is going to make things worse. The good news is that there are ways to get your student loans out of default.
First, stop avoiding those collection calls. If your student loan provider or a collection agency is calling, your best bet is to meet your lender or the agency head-on and take charge of the situation. Your lender or the collection agency will be able to talk you through your repayment options based on your personal financial situation. And remember, they want you to pay, which means that they want to help find a payment plan that works for you.
The lender will be able to offer a variety of options tailored to your individual circumstances. Some of these options might include satisfying the debt by paying a discounted lump sum, setting up a monthly payment plan based on your income, consolidating your debts, or even student loan rehabilitation for federal loans. Don’t let your fear stop you from reaching out to your lender or the collection agency.
How to Avoid Defaulting on Your Student Loans
Of course, even if you can get yourself out of student loan default, the default can still impact your credit score and loan forgiveness options. That’s why you should always try to avoid a student loan default. If your student loan payments are difficult for you to make each month, there are things you can do to change your situation before your loans go into default.
First, consider talking to your lender directly. Your lender will be able to explain any alternate payment plans available to you, like Pay As You Earn or income-based repayment plans. Repayment plans like these may lower your monthly payments, but some of these plans are only available to federal loan borrowers.
Another option is student loan refinancing. Refinancing student loans can help you avoid defaulting on your student loans by combining all your student loans into one, simplified new loan. When you refinance, your new loan might have a lower interest rate and loan terms that work better for you and your situation.
For example, refinancing into a longer term could help lower your monthly payment, though you would likely pay more over the life of the loan. Alternatively, you could refinance into a shorter or equal term, which would mean you could save in total over the life of the loan. You can refinance federal student loans, private student loans, or both.
Student loan default can have serious negative effects on your credit score and financial stability. If you’re worried about defaulting on your student loans, or you have already defaulted, the best thing you can do is take immediate steps to remedy the situation before it gets worse. Contact your lender or servicer immediately to learn about options available to you, and consider refinancing your loans to secure a lower interest rate or monthly payment.
Disclaimer: SoFi is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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