Student Loan default occurs when the borrower has missed payments. The number of payments it takes to go into default will vary by lender. If your student loans are federal, default occurs after nine months of missed payments. However, with private loans default can occur after missing just one payment. Default can also occur if the borrower’s agreement is violated in any way. This includes starting bankruptcy procedures. As soon as a loan goes into default the entire balance is due at once. The consequences of default can be severe but hopefully this article will show you how to avoid it.
Private student loan default can occur after missing just one payment!
Here is Your Path Out of Default
If you are in default you are not alone, one in five students are estimated to default on their student loans. As student debt is nearly impossible to discharge during bankruptcy procedures, filing for bankruptcy is unlikely to help unless there is significant other forms of debt (such as credit card debt). Fortunately, there are other ways to get yourself back on track. The best option is to “rehabilitate” your loans. This is an agreement where you make larger than usual payments for a certain period of time. If these are paid on time for the set period the loan will go out of default and go back to the way it was.
The terms of rehabilitation are set by the lender, and often require the loan to be sold to another lender. Under certain loan rehabilitation agreements you may be able to achieve forgiveness for part of the loan balance or lower your monthly payments by a significant amount. How favorable a rehabilitation agreement is often depends on the situation of the borrower and how well they communicate the situation to the lender.
Often there are new payment plans available to borrowers in default. For federal loans, you may be able to get payments adjusted to fit your income, rather than a rate determined on the loan size. In order to do this you will most likely have to go through a period of rehabilitation. Some loans can also go out of default by making voluntary payments, or by resuming normal payments. It is not very likely that borrowers will be able to resume their loan as normal after a significant period of non-payment.
It may also be possible to get a settlement. In this scenario you will need to broker a deal with your lender. This is not a payment plan. Instead the borrower needs to offer a lump sum that is enough to satisfy the lender. This is not an ideal situation as most borrowers are in default due to financial difficulties. However, the alternative is often years of collection calls, ruined credit, and garnished wages.
Your options will be determined by your lender, your credit, and the size of your loan. Most loan officers have some discretion when dealing with someone in default. In order to get a better deal you will need to speak often with your lender and advocate for yourself. Be patient and make sure you have your paperwork together and organized. Most importantly, do not ignore your loan if it has gone into default. Every day you wait more options become unavailable to you.