When it comes to paying your federal or private student loans, pretending they don’t exist or ignoring those past due notices is not a smart idea. At the first sign of financial trouble, the best thing to do is contact your student loan servicer. If you have a federal student loan, you may be able to reduce your payments by simply changing your student loan repayment plan, or asking for forbearance or deferment of your loans. Private lenders offer fewer options, but may be willing to reduce your payments temporarily, if you contact them prior to missing a payment. It’s very important to communicate with your loan servicers and show that you are attempting to repay your debt. Failing to do so can have serious consequences, including student loan default.
If you have federal student loans, you won’t be considered in default until you are 270 days late on your payments. Private student loans, on the other hand, are not so forgiving. Each lender has its own rules determining when your loan is in default, and it could be triggered as soon as you miss one payment. Once your loan has gone into default, many unpleasant things can happen. You may be required to pay your loan balance in full (immediately) or have your paycheck garnished, you could face staggering collection fees or have your tax refund seized, and you will definitely lose eligibility for any additional federal aid, including Pell Grants. You will also lose deferment and forbearance options (federal), and could have your social security or disability income seized. In addition, your defaulted loan will appear on your credit report, which may prevent you from obtaining credit cards, car or home loans, or even prevent you from renting an apartment. You could also face higher insurance bills, have difficulty opening up new bank accounts, or be denied employment based on your poor credit.
Fortunately, you do have some options for getting your student loans back on track and out of default.
For Federal Student Loans, You Have Three Basic Options
- Payment in Full – If you pay the total amount owed, including any accrued interest or penalty fees, this will reverse the default status of your loan. Of course, this probably isn’t a viable option since you were having difficulty making the smaller payments, but it’s the quickest way to get out of default. Even if you can find a way to pay off a portion of the debt, it may help because collection fees (up to 25%) will be applied to your loan balance 120 days after your loan defaults.
- Consolidation – This option could give you more time to repay your loan and may reduce the amount of collection fees assessed. Before you can consolidate your loan(s), you will need to make a satisfactory repayment arrangement with your loan servicer. Basically, you’ll need to make three (3) consecutive payments. After you have made the payments, you must also agree to enroll in either an Income-Based, Income-Contingent, or Income-Sensitive Repayment Plan. The type of plan you select will depend on which type of federal student loan you possess. Keep in mind that if you decide to consolidate your loans you will be charged a fee of 18.5% in collection costs, which must be paid in addition to your principal loan amount and any accrued interest.
- Rehabilitation – Another way to get your loans out of default is to enter a loan rehabilitation program. Once you make nine (9) qualifying, on-time payments to your guarantor, you will receive a rehabilitation agreement that you must sign and return. Upon notification that your loan has been rehabilitated, it will be transferred to a new lender and servicer. The loan will then be considered in ‘good standing’ and you will continue to make monthly payments to your new servicer. This option also carries a collection fee of 18.5%, but unlike the other two options, the default entry will also be removed from your credit report. Unfortunately, this is a one-time deal, so make sure you keep up with your payments or you won’t get a second chance.
Fewer Options for Private Loans
If you have defaulted on a private loan, you will have to contact your lender to discuss modifying your payment terms. Expect to pay any ‘reasonable’ debt collection costs, as well as the outstanding balance and accrued interest fees. Keep any paperwork you receive regarding your debt, and review your rights when dealing with debt collectors. If you have difficulty communicating with your private student loan lender, you may should contact the Consumer Financial Protection Bureau (CFPB) and ask for assistance or file a complaint.
One Last Tip…
Dealing with collection agencies is never fun, and the adverse effects of a student loan default can haunt you for a lifetime. Do yourself a favor and avoid this situation all together by making timely monthly payments, keeping your contact information up-to-date, and alerting your loan servicer to any changes in your employment, as soon as possible. Your lender will be much more willing to work with you if you are honest and take the initiative to make arrangements before things get out of hand.