With many young graduates carrying anywhere from hundreds to hundreds of thousands in student loan debt, students are currently facing a mountain of a financial challenge. On top of already high numbers, student loan debt is a sticky kind of debt… as in it stays with the borrower or cosigner no matter what.
There’s no declaring bankruptcy should you find yourself in over your head.
There’s no ignoring bills if you can’t make the payments.
There’s no getting rid of it.
But what about when you simply can’t make payments on your loan? Beyond a late payment fee, continuing to let your student loan bills stack up will eventually lead to larger repercussions. Namely, student loan default.
Borrowers can default on a loan for any number of reasons. Some borrowers default because they’re financially unable to make payments. Others default unknowingly on a debt they didn’t know that they carried. But one thing remains true among all these possibilities: If payments aren’t received by your lender, your student loan will default. What exactly does that mean? Let’s take a look.
Defaulting on your student loan debt
Late payment timeline
- As soon as you miss your first student loan payment, you’re considered delinquent. This status can act a bit like a red flag to both you and the lender.
- After a payment reaches 90 days past due the delinquent status will be reported to the three major credit bureaus and a mark negative mark will be added to your credit report.
- After 270 days past due, a student loan is considered to be in default. At this point, your debt will be put into collections and payment will be required from collections agencies.
Repercussions for defaulting on your student loan
Loss of eligibility for forgiveness plans
If you have federal student loans in default, you’ll lose protections such as federal forgiveness programs, forbearance, deferment, and access to different repayment plan options.
Lowered credit score (and resulting consequences)
The default will be noted in your credit report and will continue to be visible to lenders even if the default is quickly resolved. Keep in mind this hit on credit can impact your eligibility for loans, increase your mortgage rates, and even impact your future employment opportunities.
Once your student loans are turned over to collections, you’ll be responsible for any associated collections fees. These will be tacked on to your initial balance of principal and interest.
Tax Refund Offset
Should you fail to pay on your defaulted loans, you may have your tax refund applied to your student loan payment. This is an automatic process and one that can be particularly difficult should you rely on your refund or end up owing the IRS taxes.
The government may begin to collect payment by automatically deducting up to 15% of your paycheck. This will be used to pay debt collections fees, interest, and then principal of your debt. For more information on how this works, check out our post on wage garnishment.
If you continue to ignore your defaulted loan you may face even more serious legal repercussions. The government can sue you at any time after your student loan has reached default status.
Higher interest rates
Along with a lowered credit score you’ll also face the higher interest rates that often accompany a lower score. Since the mark of default can live for years on your credit report it’s a consequence that could potentially follow you for years.
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What to do…
If you’re facing the possibility of default
There’s nothing quite so scary as receiving a bill you know you can’t pay. But despite the strong emotional response it instills, it’s essential that you act on the issue and explore your options. Rest assured, you’re not alone in your struggle.
Talk to your lender about changing your repayment plan to one that makes sense with your financial circumstances. They’re there to help guide you in your repayment and can answer any questions you might have. Beyond answering your questions they can also tell you if you qualify for programs like the Income Based Repayment plan or Pay As You Earn plan. These plans can lower your monthly bill to a number that may feel more manageable.
If you’ve already defaulted on your student loans
Take action as soon as you can. While it’s scary to receive calls from debt collectors it’s also empowering to take charge. Be the one to make the call, start the conversation, and begin exploring your options.
The agency or lender may offer a few possible options, including:
- A repayment program based on your current salary
- Payment in full
- Debt consolidation
- Federal Loan Rehabilitation program (if the defaulted loans are federal loans)
Depending on your current financial situation you might find yourself positioned to benefit from one more than the others. Go into the conversation prepped with your financial stats and account information. Your lender or debt collections agent will be able to talk you through the process of working through the tasks ahead and setting up a plan that you can manage.
Don’t let default upset your financial future
Default is a real financial challenge but it doesn’t mean that all is lost for your financial foundation. The key to avoiding or bouncing back from default is to maintain contact with your lender or servicer as soon as you anticipate any financial challenges. Keeping the lines of communication open will help you to maintain your sense of direction and to help you carve out your plan of action. Above all, remember, you’re not alone. For a closer look at the experience of defaulting on student loan debt, check out one woman’s personal story of student loan default shared via The Billfold.
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