WHAT TO DO AFTER YOU DEFAULT ON YOUR STUDENT LOANS
Student loan debt is a common thing amongst college students and at some point in your college lifetime, you will hear these three words. It is important that you understand student loans and know what you are getting yourself into before you sign the contract and take the money.
Student loans are a big deal and you do owe the money back, so it is not free money to pay for college. If you take out student loans and then do not pay them back for one reason or another, your loans will go into default.
Default occurs when your loans are considered to be in an extended delinquency period. If you fail to make your student loan payments, your student loans will become delinquent. Continued delinquency without resolve will lead to default and this is not a pretty situation for you.
In fact, lenders can take legal action against you if you do default on your student loans. Before you panic, there are some ways to climb out of the debt once you have defaulted and if you have received the letter that your loans have defaulted, take a deep breath and consider the options below.
Repay Your Student Loans in Their Entirety
This first option is not always an option for many students, but it is one that needs to be discussed. If you want to get out of student loan debt, you do have the option to pay off your student loans in their entirety.
If you chose this option, it is important to speak with your student loan servicer BEFORE you pay off the loan to ensure that you know the total amount that needs to be paid.
Your student loan servicer will be happy to work with you and will often provide you with additional options when it comes to paying off your student loans.
Entering into Loan Rehabilitation
If you have never heard of loan rehabilitation, do not worry. This concept is one that is used when a student has defaulted on their student loans and they want to work on restoring those loans into good standing once again.
To be eligible to participate in the rehabilitation program, you must commit to:
- Make a total of nine monthly payments
- Make all of those nine payments within 10 consecutive months
- Make each of the nine payments within 20 days of the date the payment is due
When you sign into the loan rehabilitation program, your monthly payments will be calculated at a rate of 15 percent of your discretionary income. Often times, students who have a low income will only have to pay a small portion per month.
If the payment amount is calculated and you are still unable to make the payments, you can apply under special circumstances and have your payments changed. You will need to provide statements of how much income you earn and fill out an expense sheet.
You will then receive a new and updated monthly amount that you can accept to pay or you can choose the original amount if the new amount is, for some reason, higher than the original.
If you do not meet the above discussed requirements, your loan will not be rehabilitated. It is important to know that a student loan can only be rehabilitated once.
Student Loan Consolidation
Another option available to help you get out of default is student loan consolidation. This will allow you to simply pay off all of your student loans in one, simplified payment. Instead of three or five different student loan payments to make each month, these loans are combined together and you simply make one payment.
Before you can consolidate a student loan that is defaulted, you must:
- Make three voluntary, consecutive, on-time, monthly payments in full on your defaulted loan
- Agree to repay your new loan under a qualifying income-driven repayment plan
Consolidating your student loans is beneficial for you and it can help reduce the amount of interest you pay over time. When you do consolidate the loan itself, you will receive a new interest rate and your monthly payment may even be a bit lower.
Severe Implications of Student Loan Default
If you do default on your student loans, there are severe implications for doing so. In fact, you will not simply receive a slap on the wrist and you may find yourself paying the ultimate price for it. It is important that you handle your student loans if they are in default.
Some of the severe consequences include:
- Legal action can be taken against you
- Your entire loan amount can become due immediately
- Your delinquency is reported to credit bureaus
- You lose federal student loan benefits
- You become ineligible for student loans until the default is handled
- You cannot apply for repayment plans, forbearance, or deferment
How Many Payments Can Be Missed?
While a single missed payment will not send your student loans into default, it can have some consequences too. You do not want to miss any of your payments and if you think you might, you need to contact your loan provider immediately to let them know you are having trouble paying your monthly amount.
If you miss a single payment, you may find that it is difficult for you when you attempt to apply for the things you need to include rent, utilities, and credit cards. Why? Because the late payment is reported to the credit card bureaus and a missed payment has a negative effect on your credit.
Final Thoughts on Student Loan Default
If you find out that your student loans are in default, you need to take steps to resolve the default and restore the loans back to good standing. If you do not, you may have your tax return seized, wages garnished, and even legal action taken against you.
On a final note, if you know that you will not be able to make a payment or you struggle to make your monthly student loan payments, contact your loan servicer provider right away.