What If I Default On Student Loans

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Many Americans struggle to pay off their student loans. In fact, 10.8% of student loan borrowers are delinquent or in default—that’s 5.5 million people.

What If I Default On Student Loans

As the student loan crisis worsens over time and the debt-to-income ratio approaches 100% for recent graduates, more and more borrowers expect to default on their loans.

Strategic Default For Student Loans: Why It’s A Bad Idea

The current average debt-to-income (DTI) ratio of student loan income and income is over 65%. Once your student loan DTI ratio reaches 100%, you can officially pay off your loan in 10 years or less. You can calculate your DTI by dividing the total amount of your student loans by your annual salary and multiplying it by 100.

Avoiding default on your loan should be a priority for you. So what happens if you default on your student loans?

Missed payments can lead to poor credit, increased interest rates, calls from collection agencies, and garnishment of wages and tax returns.

The moment you begin to struggle with your debt payments, you should contact your credit servicer to discuss your options.

Individuals Who Default On Their Student Loans Could Lose Their Professional License

Let’s look at the consequences of defaulting on your student loans and how to avoid them.

If you miss or are late on a payment and do not contact your credit servicer to correct the situation, your account status will change to “default” after 270 days.

Default status comes with heavy penalties: Your missed payments, total balance, late fees, accrued interest, fines and penalties will be paid immediately.

Before you go into default on your credit, your account will change from current to delinquent. This happens when you make a late or missed payment. You will remain in delinquent status until you contact your credit servicer to make a payment or request a delay or forbearance.

There’s A New Way Out Of Student Loan Default. It’s Called Fresh Start

Once you make a late payment or miss a payment altogether, you will be charged a late fee. Your late fee may earn interest along with your total balance. Your late fee can be 5% of your monthly payment amount.

Every month you miss a payment, you will be assessed an additional late fee. You will need to contact your credit servicer to find out how much you owe to bring your account back to “current” status.

Once your account is in default, your missed payments, total balance, late fees, accrued interest, fines and penalties will be paid immediately. Your debt servicer will hire a collection agency to try to recover your payments and you will have to pay their fees.

A missed payment can also cause long-term problems, as your credit bureau may report the missed payment to the credit bureaus. You may find that you can’t get approved for a credit card or new loan, and your credit card interest rates may increase.

Ways To Get Out Of Student Loan Default

Federal student loan servicers report late payments to the three major credit bureaus before you officially go into default—after 90 days.

The first step in getting out of default is to contact your credit servicer or the collection agency that called you. Your credit servicer will give you only two options to get out of default.

Another option is rehabilitation, in which you and your lender make 9 timely payments of an agreed upon amount. After making these 9 timely payments, your loan will be back in default and in good standing.

Once you’re in default, you’ll have access to a variety of payment plans, and you can choose one based on income that has affordable payments for you.

How To Handle Federal Student Loan Default

With rehabilitation, you won’t be out of debt until you make all nine payments on time, which can take up to 10 months.

With consolidation, your loan will be in default with a zero balance after your application is completed within 60-90 days.

With rehabilitation, you can move forward with the process while your wages or tax refund is garnished. However, you must make your 9 payments on time as your wages are being garnished together.

With consolidation, you must vacate the garnishment order or judgment to proceed with consolidation.

Measuring Student Loan Default Today

If you are rehabilitating more than one bad debt, you will have to go through the rehabilitation process for each individually and pay 9 times for each loan.

With consolidation, you can consolidate all your existing debts into just one payment, with a set due date.

With a refinance, you will continue to have your loan on the same terms as before, unless you contact your lender and choose a new payment plan.

With refinancing, you keep your loan balance, payment term and interest rate until you decide to change it.

How To Get Your Student Loans Forgiven

With rehabilitation, you still have the same debts as when you started; This also means that once you are in default, you still have the same benefits for that loan.

With consolidation, you have a new loan and lose the borrower benefits associated with your current loan, including interest rate discounts, principal discounts or loan cancellation benefits.

The best solution is to prevent your loan from reaching default status. Once you start having trouble repaying your debt, you should contact your credit servicer to discuss your options.

There are several changes you can make to your payment terms that allow you to keep your “current” status and maintain your credit score:

Student Loans: What Happens If You Default

Another important step to avoid defaulting on your loan is to create a detailed spending plan. By creating a budget and sticking to it, you ensure that money is available to pay off your debt when you need it.

Depending on whether you choose rehabilitation or consolidation to get out of default, you’ll have different paths back to financial health. Both options offer unique benefits and challenges, and you need to consider your long-term goals to determine which is right for you.

If you’re looking for a quick way to get back to your current position, integration will get you there in no time. But if you want to remove defaulted loan(s) from your credit report, rehabilitation is the best solution.

Whichever option you choose, you will be on your way to financial recovery. Both rehabilitation and consolidation have advantages and disadvantages, but both open up new opportunities.

Herded Into Default, Borrowers Are Then Hounded To Repay Student Loans

Defaulting on your student loans can cause many problems. Low credit scores, high interest rates, and the inability to get approved for new lines of credit and loans can haunt you for years. This can affect your ability to buy a car or home and put extra money on your credit card balance.

If you are in default on your student loans, you should contact your loan servicer(s) immediately to discuss your options on how to get current.

FAQs about what happens if you default on your student loans: What happens if you default on your student loans and leave the country?

There are no statutes of limitations on federal student loans. This means that collection efforts can continue indefinitely, and can be retrieved upon your return to the United States. If you plan to never go back, you can avoid paying off your student loan debt. But if you go back, you can expect your credit to explode, making life very difficult. If a family member has co-signed your loan, they will be held responsible for repaying your loan in full.

Defaulting On Student Loans: What You Should Know

If you are in default on your student loans, contact your loan servicer immediately. You have to choose between rehabilitation and consolidation to get your debt back on track. At that point, you can choose another payment plan that works with your current budget and future goals.

Private loans can go into default or collection earlier than federal student loans, up to 120 days past due. Once you default on a private student loan, the loan balance is immediately due. Your debt goes into collections and affects your credit score. Private creditors can also take you to court to get an order allowing them to garnish your wages, although the process is more complicated than for federal student loans. Have you fallen into student loan default? Right now you may be feeling many emotions – frustration, fear, shame, anger. This is normal. Although student loan default is severely crippling, it is not the end of your world. It’s important to remember that you can climb out of that hole.

There are three main options for getting your student loans out of default: full payment, consolidation, and student loan rehabilitation. Not making payments on your student loan puts you into student loan default, so it makes sense that you need a certain amount of money to pay off your balance to get out of default. The main difference between these options is the amount you have to pay upfront to get out of default.

Repayment is the easiest way out of student loan default

What Happens If I Default On My Student Loans? [infographic]

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