What to do BEFORE Defaulting on Your Student Loans
If you fail to make payments on your student loans, you will eventually become behind in payments and you will be in default. Default is often described as failure to fulfill a commitment that you have made, which in this case is paying your student loan debt.
It is important to know that you can be late on a couple of payments and NOT be in default. You do NOT want to be in default because it has severe and negative effects on you and your credit score. In fact, you can have your wages garnished, your tax return seized, and liens placed on properties that you own.
There are ways that you can avoid default and some things you should do BEFORE you reach this default point. Continued failure to pay your student loan obligations will result in your inability to get student loans in the future.
Let’s take a look at some of the things you can do before you actually do default on your student loans. Remember, if you ever find yourself in a situation where you need additional help, speak with your student loan servicer.
Get a Job
If you do not have a job, you may want to consider getting one to help you pay down your student loan balance. It may not be an ideal situation for you, but it is something that you need to do to handle your financial debts.
If you already have a job and you still cannot afford your student loan payments, then you may want to consider a second job or, at minimum, a summer job.
There are many different types of jobs that you can get and while some of them ma pay minimum wage, you can use the extra income and send it directly to your student loan servicer. For example, if you work one job and it pays for all of your bills and you have some money left over, you could get a second job and send all of that secondary income to your student loan servicer to pay down the balance.
Consolidate Your Student Loans
Before you default on your student loans, you should try to consolidate them first. Consolidation is the act of combining multiple federal student loans into one single loan. When you do this, you will receive a weighted interest rate, which is the average of all interest rates on the loans.
Once your student loans are consolidated, you will then only make a single monthly payment as opposed to multiple monthly payments to different loans. Consolidated loans can eliminate the confusion of having multiple loans in your name and you will benefit from only having to worry about a single payment monthly.
Refinance Your Student Loans
Another option available to you is to refinance your student loans. This is a good option for students who have good credit or students who have a cosigner who is willing to sign on the loan for them.
When you refinance your student loans, you will receive a lower interest rate, which in return offers you a lower monthly payment. You can save thousands of dollars over the course of your loan term.
If you think that you may default, you can refinance and bring your loan to an affordable monthly rate. Refinancing is similar to consolidation, but your interest rate is not weighted, which means it can be as low as two or three percent.
The refinancing process includes your new private lender paying off your student loans and then creating a new loan with all of the new terms.
Change to a New Payment Plan
If you think that default may be in your future because of your financial situation, take some time to switch to a new repayment plan. This is often one of the steps taken by students to help save their loans from the default process.
Your loan servicer does have a number of repayment plans for you to join and you are not stuck with the original one you were put on. For example, you can apply for an income-based repayment plan, which factors in your family size and your income BEFORE your monthly payment amount is calculated.
Students who fall below the income threshold may have a payment amount of zero dollars per month in some cases.
There are additional repayment plans that you can apply for such as the Pay As You Earn Plan and the Extended Repayment Plan. Each one of these will help lower the amount you pay monthly, but it may extend the length of your loan over time as well.
Consider Forbearance or Deferment
Lastly, you can apply for forbearance or deferment of your student loans. Often times, students will apply for this when they need a financial break from paying their loans when they lose their job or run into a difficult financial situation.
There is a difference between forbearance and deferment. Forbearance is often used when you do not qualify for deferment. When you are approved for forbearance, you will not have to pay for your student loans for up to a 12-month time period or you may be able to make reduced payments on your student loans.
When a deferment is granted to a student, it means that the student’s principal balance of the loan and all interest accrual is delayed and stopped for a set period of time.
You often have to reapply each year for the forbearance or deferment program.
Final Thoughts on Saving Yourself from Default
There are many different options available to you and each one can help you save yourself from default. Student loans that are in default are not a good thing and will actually negatively impact you and your credit.
If you ever think that you may default or you find that you are in a position where you cannot afford your monthly payments, contact your loan servicer immediately to discuss your available options.