What Happens If You Default on Student Loans?

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  • When you default on your student loan, it means you haven’t made a payment for a long time.
  • A student loan default can damage your credit and prompt your employer to withhold some of your wages.
  • If you default on your student loans, there are ways to get out of it — including rehabilitation.

Student loans are an invaluable tool to help you pay for higher education, but they also come with certain risks. About one-third of federal student loan borrowers end up in default, meaning they miss their payments for an extended period of time.

If you default on your student loans, you face many consequences. It can hurt your credit score, eat into your income, and reduce your tax refund and government benefits. If you’re behind on your student loans or worried you might default, here’s how to do it.

What does it mean to be in arrears on your student loans?

You’re in default on your student loan if you’ve missed payments for at least 270 days (federal loans) or 90 days (private loans) — although the exact number of days may vary by lender.

Default is not the same as delinquency. Default means non-payment for an extended period of time. Being in arrears means you’re late on a payment – even if you’re only a day past the payment due date.

“Like most loans, student loans are considered delinquent the moment a single payment is late,” said Peg Keough, director of education at College Aid Pro. paid, sometimes just ‘don’t do it again’.”

When you default on your loan, your lender will report late payments to the three major credit bureaus—Experian, TransUnion, and Equifax. This can hurt your credit score and make it harder for you to apply for another loan, buy a house, or get a credit card.

How do you check if your loan is in default?

If you think you might default on your student loans but aren’t sure, there are a number of ways to check. To view federal student loans, log into your StudentAid.gov account with your Federal Student Aid (FSA) ID. Once logged in, you can see the status of all your federal loans.

If you have private student loans, check your credit report to see if they are reported as default. Every consumer can get a free annual credit report from each of the three credit bureaus. You can get it at AnnualCreditReport.com. Your credit card company or bank may also offer free credit report monitoring.

If you do not see your private loan on the report, please contact your lender directly.

“They risk falling off their credit report,” Keogh said. “In this case, it may be difficult to track down default information. It may be the case that the lender sells the loan to a debt collector, and the debt collector will actively seek you out.”

In some cases, your loan may be mistakenly defaulted on. Maybe you were in school and should have received an in-school deferment, or maybe your service staff approved your forbearance and your payments are on hold.

If this happens to you, please contact your school registrar and loan servicer.

“Be prepared to provide documents, such as bank statements or a stay agreement,” Keogh said. “You should also contact the credit bureaus and file a dispute.”

What happens when you default on your student loans?

Once you default on your student loans, you have a few problems. Your credit score could take a hit, you could incur hefty late fees, and you could find lenders reluctant to approve your loans and credit cards.

When you enter default, you see more and more serious consequences. E.g:

  • Your entire loan balance may be acceleratedwhich means it — plus any interest you owe — becomes due immediately.
  • You will lose eligibility for federal loan benefits Examples include forbearance, deferrals, and income-based repayment plans. You are also not eligible for additional federal student aid.
  • The government may withhold your tax refund and other federal benefits to offset your debt.
  • your wages may be garnishedwhich means your employer will withhold part of your salary to pay off your loan balance.
  • You could be sued. You may owe court costs, collection fees, attorney fees, and more.
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Defaulting can also damage your credit, which can make it difficult for you to achieve other financial goals.

“For student loan borrowers who find themselves in default, the consequences are not pleasant,” Keogh said.

How to Keep Your Student Loans From Default

If you default on your student loans, there are other ways out. Although unlikely, you can pay off your debt in full. If not, you can choose to recover your debt.

When you reinstate your loan, you will regain access to many of the federal student loan benefits you were previously eligible for. This includes deferment, forbearance, forgiveness and access to future assistance.

“After your loan is reinstated, the federal government will remove the default from your credit history and restore your loan to its current status,” says Mark Kantrowitz, student loan expert, author and president of PrivateStudentLoans.guru.

The exact steps to reinstate your federal student loans depend on the type of loan you have. For a Perkins loan, you will need to make full payments for at least nine consecutive months.

For Direct Loans and Federal Home Education Loans, these payments must be “reasonable” (not paid in full) and filed within 10 months.

If you have federal loans, the Fresh Start program is also an option for you to get out of default. The program does not count as rehabilitation and will:

  • Make sure you retain access to federal loan programs
  • Stop attempts to charge your account
  • Provides you with future repayment options such as income-driven repayment plans, forbearance, deferment and student loan forgiveness
  • Restore your ability to recover future loans.

To be eligible, your defaulted loan must be a Federal Direct Loan, Federal Family Education Loan, or Perkins Loan. The Fresh Start program will go into effect once the COVID-19 federal student loan repayment suspension ends on December 31, 2022.

“When repayments on federal student loans restart, the Fresh Start program restores all defaulted federal student loans to their current status, removes the default from the borrower’s credit history, and removes other negative loan-related negatives from the credit history. information,” Kantrowitz said. “Borrowers will have one year to select a repayment plan and commence repayments according to the repayment plan. Otherwise, default will resume at the end of the one-year period.”

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The last option is to consolidate your debts. For federal loans, this entails obtaining a Direct Consolidation Loan, which is then used to pay off all loan balances. This essentially consolidates all your loans into one loan, simplifying the repayment process. With private loans, it simply means taking a new, larger private loan—an amount equal to your existing loan balance—and using that money to pay off those loans.

“This path is easier to pursue than loan recovery, but the benefits are primarily process simplification, not necessarily financial relief,” Keogh said.

Can you discharge delinquent student loans in bankruptcy?

Despite common misconceptions, your student loan debt can be discharged through bankruptcy. This is true for both private and federal student loans.

The process for doing this depends on the type of loan you have, what the funds are used for, and your financial situation. In general, though, experts say the path is fraught with challenges.

“Arguably the trickiest and most frustrating aspect of student loans is how hard they are to discharge in bankruptcy,” Keogh said. “The stark reality is that even after bankruptcy proceedings, the vast majority of student loans still need to be repaid.”

To qualify for student debt forgiveness, your payments will need to constitute what U.S. bankruptcy law calls “excessive hardship.”

“It means you can’t maintain a minimum standard of living while repaying your loan, which is likely to continue, and you’ve made a good-faith effort to repay your loan,” Keogh said. “Very few will meet these stringent standards.”

If you are considering bankruptcy, consult a bankruptcy attorney first. They can advise you on the process and how it will affect your student loans.


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