The tides of student loans are rising, and have been for some time. Student loan debt is at an all-time high , with more students graduating with debt than ever before. As recent graduates begin their careers, it can be overwhelming to figure out how to make monthly student loan payments.
Ignoring your payments may seem like the easy way out, but student loan default can have extreme consequences. If you’re struggling with student loan payments, have already missed a few, or are already in default, know that there are ways to recover.
What Is Student Loan Default?
If your student loan is in default it means you have failed to make payments on your student loans. Defaulting on your student loan takes place over a period of nonpayment.
When you first miss a payment, your loan becomes delinquent . After 90 days of delinquency, your loan servicer can report the missed payments to the three major credit bureaus.
Generally, after 270 days of nonpayment, your loan will go into default. This can depend on the specific type of loan you hold, so be sure to confirm.
How and when default occurs on private loans depends on the lender. But generally, private student loans can go into default even sooner than federal loans do.
How Common Is Defaulting on Student Loans?
Defaulting on student loans is becoming increasingly common. Data from 2018 shows that 1 million student borrowers go into default each year.
Erin Dunlop Velez, an education research analyst with RTI International, crunched the numbers over 20 years and found the average loan default happened approximately five years after graduation.
What’s more, only half of the undergraduate borrowers studied had paid back their loans in 20 years. One report suggests 3,000 borrowers default every day .
What Are the Consequences of Student Loan Default?
Defaulting on your student loans can have some pretty steep consequences . For starters, the entire balance of your student loans could become due in full.
If you default on your student loans, your lender will eventually turn your debt over to a collection agency who will bombard you with calls, emails, and mail to try and collect your debt.
If you default, you may lose eligibility for programs that may make it easier for you to manage your debt, such as deferment, forbearance, or Public Service Loan Forgiveness.
Once your student loans are in default, your loan servicer or collection agency will report your default to the three major credit bureaus, which will impact your credit score.
And if your servicer can’t collect the money you owe, they can ask the federal government to garnish your tax return or a portion of your wages.
How Can You Recover From Student Loan Default?
If you failed to make payments on your student loans and, as a result, they have gone into default, you don’t have to let it ruin your financial future. Here are some steps you can take to get back on track .
One option to recover from default is student loan rehabilitation . To rehabilitate your loan, you must work with your loan servicer and agree in writing to make nine voluntary, reasonable, and affordable monthly payments over a period of 10 months.
In order to rehabilitate a Direct Loan or FFEL program loan, your monthly payments must be no more than 20 days late. Your loan servicer will determine the new monthly payment, which is 15% of your discretionary income.
When you have successfully rehabilitated your loan, the default may be wiped from your credit history. Note that any late payments reported to the credit bureaus before the loan went into default will remain on your credit report.
Another route to recovering from student loan default is to consolidate your student loans. The Direct Consolidation Loan program allows you to pay off one or more federal loans with a new consolidation loan. To be eligible, you must either agree to make payments on an income-driven repayment plan or make three, full, on-time, and consecutive payments on the defaulted loan.
Repaying Your Loan in Full
Of course, another option to get out from under the shadow of student loan default is to repay your loans in full.
Options for Private Student Loans
If you have private student loans that are in default, you can contact your lender and see what possibilities are available to you. Some lenders may have options similar to the federal programs. As mentioned above, the time it will take for your unpaid private loan to go into default depends on the lender—but the timeframe could be relatively short, even just 120 days. However, if you’ve only recently missed a payment, you can try to start making payments again (and repay the missed payment) to prevent your loan from going into default.
Is Refinancing an Option for Defaulted Student Loans?
If your student loans are currently in default, refinancing your loans can be difficult. When you refinance your student loans, you take out a new loan with a private lender. When you apply for a refinancing loan, lenders will use your credit score and financial history, among a few other factors, to determine if you will qualify for a loan.
If your loan is already in default, your credit score has likely decreased and will likely impact your ability to get approved for a new loan. If you have a family member or friend who is willing to cosign the loan, however, you may be able to refinance your student loans that way.
Another possibility for refinancing your student loans would be to rehabilitate your loans first. A lot of lenders might turn you down for having a defaulted loan on your credit history, but others might be willing to look past that and onto your education and income potential to approve you for a loan.
How to Manage Student Loans Without Going Into Default
If you’re struggling to make student loan payments but haven’t yet defaulted on your loan, taking action now could help prevent financial issues in the future. Here are some options that could help you take control of your student loan debt and avoid going into default.
Forbearance or Deferment
If you’re unable to make payments on your student loans due to a sudden and temporary economic change, you might consider applying for deferment or forbearance . Both allow you to temporarily pause your loan payments.
If your loans are in forbearance, you will be responsible for paying accrued interest during the forbearance period. If your loans are deferred, depending on the type of loan you hold, you may not be responsible for accrued interest during the deferment period.
While your loans are in deferment or forbearance you do have the option to make interest-only payments on the loan. In the case that you don’t, the accrued interest on most loans will be capitalized on the principal. You’ll then be charged interest on the new principal.
Applying for Income-Driven Repayment
Another option to help manage your student loans is income-driven repayment . There are four income-driven repayment plans available to federal student loan borrowers. Depending on the type of income-driven repayment you qualify for, your monthly payments will be anywhere from 10% to 15% of your discretionary income.
Income-driven repayment plans allow you to lower your monthly payments by stretching the term of the loan to either 20 or 25 years . This means that while you could pay less per month, income-driven repayment could cost you more in interest over the life of the loan.
Consolidating Your Loans
Even if you’re not in default, you can consolidate your federal loans through the Direct Loan Consolidation program . This program allows you to combine your federal loans into one consolidated loan. The new interest rate will be the weighted average of the existing loans, rounded to the nearest eighth of a percent, so you might not lower your interest rate, but you’ll only have to track one monthly payment.
Refinancing Your Loans
If your monthly student loan payments are difficult for you to manage, you could consider refinancing with a private lender. If you have a combination of private and federal student loans, you could refinance both types into a single loan.
It’s important to note that if you are thinking of taking advantage of any federal programs like income-driven repayment or Public Service Loan Forgiveness, then refinancing may not be right for you as you’ll lose your eligibility for these programs.
Refinancing can give you an opportunity to qualify for a lower interest rate or lower monthly payments, and you’ll only have to worry about tracking one payment each month. You may also be able to customize your repayment term—either lengthening or shortening the term.
If you lengthen the term you could reduce your monthly payments, but you may end up spending more money in interest over the life of the loan. To see how refinancing could impact your student loans, take a look at SoFi’s student loan refinance calculator.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.