What to Do When Your Student Loan Goes Into Default
When you take out a student loan, you are gambling on the hope that once you have your degree, you’ll be able to land a reasonably well-paying job within a fairly short amount of time. Then paying off your loan is not supposed to be a hardship—theoretically.
Of course, it doesn’t always work that way in real life. You could have trouble finding a job, land a job that doesn’t pay well, or choose a career path that isn’t lucrative even after you’ve been in it for a long time. Or, you could leave school before graduating for a range of reasons.
Regardless of your financial and educational situation, however, you are still expected to pay off your student loan eventually. You can defer it because of financial hardship for a while, but this isn’t always easy—and under most deferment agreements your interest continues to accrue. Unless you’ve landed a job that pays your loan for you, the bill eventually comes due—and the longer you’ve put it off, the larger it will be.
Here’s an overview of what will happen if your loan goes into default—and what to do if you can’t repay your loan.
What Is Default?
When you miss a single payment on your student loan, you’re considered “delinquent.” If you don’t make any payments for a longer period of time—often around nine months—you are in default.
Consequences of Defaulting
Your lender may pass your student debt to a collections agency—and you’ll be billed for the cost of collections as well as the cost of the loan and interest. This can add as much as 25% to the final bill.
Your lender can sue you for the remainder of the loan.
You can have your wages garnished and your tax refunds paid to the lender until the loan is repaid—before you’ve been sued.
Your credit rating will suffer, which will cause you trouble later in getting other types of loans—such as mortgages or car loans. Bad credit ratings can even cause you trouble in renting apartments and landing a job.
When You Can’t Pay: Your Options
It’s never a good idea to ignore your student loans. It’s very difficult to escape them by filing for bankruptcy, as you can with other types of debt. While it is possible to discharge your debt if you prove that paying them back would constitute a financial hardship, the bar for that proof is set very high.
Typically, your loans will be out of default once you have made payments toward them for nine consecutive months—a process the federal government refers to as “rehabilitation.” This might be easier said than done, however, since you’ve had to go into default in the first place. Here are a few options for you if you’re having trouble making those monthly payments.
Call your guaranty agency
The only way to get rid of your student loan is to repay it. Before you go into default, you have options—if you can prove that you’re in financial hardship, you can qualify for deferment or forbearance. Once you go into default, you no longer have these options.
You can, however, get in touch with the federal government or your lender to work out a payment plan that you can manage, and that should probably be your first step. The Federal Department of Education can be reached at 1-800-621-3115, and more information can be found at the Department of Education's website.
Find out more about your loan
Depending on the type of student loan you have, your options may be slightly different. If it’s been a long time since you’ve last made a payment or even thought about your student loan, you may need to start by figuring out exactly what type of loan you have. This can be done using the Federal Government’s student loan locator system.
Consolidate your loan
If you have several federal loans that have not been consolidated, this might be a good thing to look into. Student loan consolidation replaces several loans with different interest rates into a single loan with a single monthly payment and a single interest rate. Just one monthly payment is easier for most people to deal with, and if you consolidate with a low enough interest rate, it could save you some money. You’re eligible to consolidate after you’ve made three consecutive payments to your defaulted loan.
Depending on the type of student loan you’d have, you’d consolidate through the FFEL Consolidation or the Direct Consolidation loan programs.
Object to wage garnishment
If you have defaulted on a federal student loan, the government gets to garnish your wages. You can object to this, however. To do this, you have to file evidence within 65 days of your garnishment notice, you have to file evidence that you shouldn’t have to repay the loan through garnishment. Acceptable reasons for this include:
- You’ve already renegotiated a payment agreement.
- Your loan has been forgiven.
- You’re still waiting to hear the outcome of your bankruptcy filing.
- You are permanently and completely disabled.
- You’re waiting for a tuition refund from your school.
- The school you attended falsely certified you as eligible for the loan.
- Your school was closed before you could finish your degree.
If you’re having trouble paying back your student loans, talk to your lender before the loans go into default—if you do, you’ll still be eligible for deferment, forbearance, and income-based repayment plans (IBR’s). Under these, you may be able to postpone payment or adjust the repayment terms to a more affordable amount that can keep you from defaulting. If you do default, get in touch with your lender as quickly as possible to arrange a repayment plan that works for you.
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch