What is Student Loan Default?
Student loan default typically means you failed to repay your student loan according to the terms agreed to in the promissory note. But having defaulted student loans means something different to each loan holder as well as getting student loans out of default. That’s because each lender sets terms regarding your loan repayment plan. For some federal student loans, you may default if you have not made a payment in more than 270 days. Private student loans, on the other hand, are not so forgiving. Each loan servicer determines when your loan is in default. So you might trigger default if you miss a monthly payment.
This is all very different than being delinquent or past due. That tends to happen the first day after you miss a student loan payment. You should also know what happens if you are overdue for 90 days or more. In that case, your loan servicer typically reports the series of late payments to the three major national credit bureaus. As a result, it may affect your credit score. If you have poor credit history, it may make it harder to get credit cards, new loan for a home, car, etc.
It may also be a challenge to reestablish good credit. If you do, it may come with a higher interest rate than someone with a good credit rating. This may make it more difficult to:
- sign up for utilities
- get homeowner’s insurance
- secure a cell phone plan
- pass a credit check (e.g. if you want to rent an apartment, they tend to run your credit report)
Federal Student Loan Default
The rules about loans from the federal government depend on the type of loan it is. Loans made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program follow the 270 day default rule. For a loan made under the Federal Perkins Loan Program, it is not the same. You may be in default if you don’t make a payment by its due date. There could be other consequences of default.
Federal student aid. Federal financial aid depends on staying out of default. In turn, this may make it harder to get out of student loan debt.
Acceleration. This is when the full amount of an unpaid loan balance and any interest you owe becomes due (right away).
No more deferment or forbearance. Plus, you could lose eligibility for other benefits such as the ability to choose a repayment plan.
Treasury offset. Your tax refunds and federal benefit payments may be withheld. Then, it could be applied toward repayment of your defaulted loan.
Wage garnishment. This means your employer might have to withhold a portion of your pay and send it to you whoever holds your loan to repay it.
Legal consequences. The holder of your loan may take you to court. Then, you may have to pay court costs, collection fees, attorney’s fees and other collection costs.
Withheld academic transcripts. Your school may withhold your academic transcript until you are no longer in default. Why? It is the property of the school, and it is the school’s decision not the U.S. Department of Education’s or your loan holder’s to release the transcript to you.
COVID-19 Emergency and Federal Student Loan Borrowers
To provide relief during the coronavirus, several measures are in place. They are temporary and automatic. You may take advantage or continue to make payments if you choose to. Administrative forbearance allows one to temporarily stop making monthly loan payments. Also, interest on your students may not accrue. This 0% interest and suspension of payments plans to last from March 13, 2020, through Dec. 31, 2020.
How Do You Default on Private Student Loans?
There is usually a time limit for private loan servicer student loan collection. In general, defaulted loans get turned over to collection agencies. The time limits on how long private student lenders may attempt to collect vary by state. According to the National Consumer Law Center, they are usually about six years after default. To understand statutes of limitations (the technical term), you might speak with an attorney. If debt collection practices do not prove successful, you may face a lawsuit
The timeline private lenders use for default and late payments varies. These clauses should be clear and stated in your loan agreement. With some lenders, as soon as you miss one payment, you usually are in default. In others, you may go into default after three missed monthly installments, or 120 days. Also, the lender may be able to get a court order which allows them to garnish your wages. They won’t be able to seize your tax refund or Social Security benefits. Nor does this have to mean future federal aid is off the table.
There may be a few other risks. Being in default may incur a default rate also known as a penalty rate. It is a higher interest rate that lenders may impose if you miss payments. Finally, the credit reporting agencies use the negative feedback from a default which may harm your credit score. If that happens, getting a new loan or setting up service accounts may be difficult.
How Do I Get Out of Default on Student Loans?
If you fail to make your payments on federal loans, you may have three options such as repayment in full, loan consolidation and loan rehabilitation. Each student loan servicer has a process for getting student loans out of default. So, getting out of private student loan default is very different compared to federal loans. You should also understand that there may not be a “quick fix” in either case. But that does not mean there is no student loan default help.
Unlike federal government loans, there is no law that makes private student lenders offer “get out of default” programs. According to the National Consumer Law Center, many of these lenders write off unpaid loans after 120 days of failed student loan repayment. Once this happens, they may not work with you to get out of default. Those who do clean up your credit report after you undergo their program.
Repayment in Full
One way to get out of default is to typically repay the defaulted loan in full. This may not be practical for many borrowers. It means paying the loan balance and any interest.
Student Loan Consolidation
Let’s say you have a few student loans and are in default. A Direct Consolidation Loan (DCL) may allow you to combine a few federal higher education loans into one loan at no cost to you. Once the consolidation is complete, expect to repay a single monthly sum.
To be able to do this (you have to apply first),here are two options to get out of default with student loan consolidation.
1. Agree to repay the new DCL under an income driven repayment plan (IDRP). These plans set your monthly student loan payment at an amount intended to be more affordable. As they factor in family size and income, this may be an option if something’s changed for you.
2. Agree to make three voluntary full monthly on time payments on the defaulted loan before you consolidate it. If you choose this path, the holder of your loan determines the required payment amount.
There are special caveats if you want to reconsolidate an existing Direct Consolidation Loan or Federal (FFEL) Consolidation Loan that is in default.
DCL. Apart from #1 and #2, you must also include at least one other eligible loan. If you don’t have one, you cannot get out of default this way. Your options are repayment in full or to rehabilitate your loan.
FFEL.You may reconsolidate a defaulted FFEL without including any other student loans in the consolidation. But only if you agree to repay the new DCL under an IDRP. If you include at least one other eligible loan, you may be eligible to reconsolidate an FFEL. To be eligible, you must meet either #1 or #2.
Student Loan Rehabilitation
According to StudentAid.gov, rehabilitating a defaulted student loan could take the “default” status away. It is only possible to do this once. So, if you rehabilitate a loan and default on it again, there is no second chance. One of the things rehabilitation does is put an end to wage garnishment. It may also help qualifying students regain eligibility for:
- Deferment (putting off a payment)
- Forbearance (a period of loan payment suspension or reduction)
- A choice of plans for repayment
- Loan forgiveness (loan is cancelled which may mean you don’t have to repay it)
- Federal student aid (because good standing is a criteria)
Defaulted Direct Loan or FFEL Programloan
To rehabilitate either of these loans is a two step process. First, you must agree in writing to make nine voluntary monthly payments within 20 days of the due date. Second, make all nine payments during a period of ten months in a row.
You also agree with the holder of the loan on reasonable and affordable repayment options. This amount is likely equal to 15% of your annual discretionary income. That’s your adjusted gross income minus 150% of the poverty guide for your state and size family divided by 12.
To rehabilitate this Federal Perkins Loan, you typically must make a full monthly payment each month, within 20 days of the due date, for 9 months in a row. Your lender determines the amount of this payment.
How Could You Avoid Student Loan Default?
Defaulting on a student loan may haunt you for awhile, but here are seven tips to help you avoid it.
1. Set up auto pay and make payments on time.
If your issue is that you forget to pay bills, this may be a perfect way to avoid missing loan payments. Some may offer a slight discount for borrowers who use auto pay instead of manually sending a check every month.
2. Create a budget and track your money.
Make sure to stick to a budget. You may have to cut back on expenses or pick up a side hustle or part time job. But it may present a better path than blowing up your credit rating.
3. Apply for an Income Driven Repayment Plan.
If you have federal student loans, income driven repayment plans allow you to repay each month and reflects your family size and income. The federal government offers several repayment plans.
4. Apply for deferment or forbearance.
If you are going through financial hardship or a medical emergency, you may apply for either one if your loans are from the federal government. Either option lets you have a temporary break from making payments. Through the CARES Act, these measures may be in place.
5. Check if your college owes you a refund.
If your school closed and cancelled classes due to the pandemic, they may owe you a tuition refund or credit. This is going to depend on school policy but if you receive one, it may be a useful way to pay other college expenses.
6. Alert your loan provider to any changes.
Don’t neglect to contact your lender right away to explore the repayment options available. Whether private or federal, lenders may have temporary hardship programs for borrowers who lost jobs or are in crisis.
7. Consolidate and refinance your student loans
Direct consolidation loan could help lower your monthly student loan payments. It could also make you eligible for repayment plans. Another option is refinancing federal and private student loans. You could combine all of your loans into a new loan with a lower interest rate and monthly payments. However, if you refinance federal loans, then they become private loans. So you may lose options like loan forgiveness, repayment plans, and deferment.