Student loan default is more common than you may think. More than 11 percent of the 44 million Americans with student loans are more than 90 days delinquent or have defaulted on their debt.
Going into default can have serious consequences on your financial future, affecting everything from your ability to get a new car to getting approved for an apartment. Learning how to manage your loans and prevent defaulting on your debt is essential for your financial security.
Here’s what you need to know about default on student loans and what you can do to protect yourself.
What it means to default on student loans
The first day you miss a payment, you become delinquent on your loans. If you continue to miss payments, your loans could enter into default. For federal loans, you are in default when you fail to make a payment for 270 days, or about nine months.
Private loans have much stricter limits. Most lenders consider you to be in default if you miss just three months of payments.
Consequences of falling behind
Whether you have federal or private loans, defaulting on your debt can have lasting consequences. Here’s what you can expect if you fall behind.
For private student loans, you will owe the full balance of your debt as soon as you enter default. If you recently graduated and fell behind in the first few months, that means you could owe thousands right away.
If you can’t pay up, your lender could send your loan to collections. If that happens, you can expect daily phone calls and letters about your debt. Your lender can also add collection charges to your loan, which could cause your debt to grow by up to 40 percent.
If you default, your lender can also report that to the three credit bureaus, damaging your credit score.
If you are still unable to make payments, your lender can get a court judgment against you and garnish your wages. Depending on where you live, the lender may be able to take as much as 25 percent of your paycheck.
Many borrowers have a cosigner for their private loans, and that can make defaulting even more difficult. Since your cosigner’s name is on the loan, they’re responsible for the debt if you don’t make payments. Your loved one could be on the hook for your full balance, which could strain or even destroy your relationship.
The consequences of defaulting on federal student loans can be even more severe. Like private loans, you will immediately owe the full balance of your loans, along with any interest that accrued.
You will lose eligibility for valuable federal loan benefits like access to income-driven repayment (IDR) plans, deferment, or forbearance. You also will no longer qualify for further financial aid.
The government may send your loans to collections, but unlike private lenders, they can also go after your taxes. If you default on your loans, the IRS can take your entire tax refund.
The federal loan servicer can also pursue wage garnishment against you or take legal action, which can prevent you from purchasing or selling assets like a home.
How to prevent default
If you’re struggling to make your payments, it’s important to take action right away to prevent default. Here are three things you can do:
- Sign up for an IDR plan: If you have federal loans, you may be eligible for an IDR plan. Under these plans, your monthly payment is capped at a percentage of your discretionary income, making your payments more manageable.
- Apply for forbearance or deferment: Both federal and private loans may be eligible for forbearance or deferment, where you can postpone making payments without entering into default. Many lenders offer temporary holds on your account if you can demonstrate financial hardship.
- Ask about alternative repayment plans: If you have private loans and are not eligible for deferment, contact your lender and ask about alternative repayment plans. Some lenders will work with borrowers, allowing you to make interest-only payments or reduced payments on your debt until you’re back on your feet.
How to get out of default
If you’ve already defaulted on your loans, it’s important to get out of default as quickly as possible to reduce the negative impact on your credit history and finances.
If you defaulted on your loans, you might be able to get out by using one of the following options.
1. Consolidate your debt
If you have federal loans, you can get out of default by consolidating your debt with a Direct Consolidation Loan. Once you consolidate, you must sign up for an IDR plan to manage your loans.
While this approach will get you out of default, consolidating does not remove the default from your credit report.
2. Rehabilitate your loans
Another option for defaulted federal loans is to rehabilitate your debt. Through this process, you agree to make nine monthly payments. The U.S. Department of Education will work with you to set up a new payment plan.
Under a loan rehabilitation agreement, they will offer you a payment that is equal to 15 percent of your discretionary income. Depending on your situation, your payment could be as little as $5.
After making the required payments, your loan is considered rehabilitated and the default is removed from your credit history.
3. Pay off the loans in full
While it may sound counterintuitive, paying off your loan balance in full will get you out of default quickly.
It may sound impossible, but being in default on student loans is a crisis situation. Weigh your options and consider asking friends or family for help to pay off the debt to get you out as quickly as possible.
4. Take out a personal loan
If you have private loans in default and don’t have the money to pay them off in full, consider applying for a personal loan. If you can’t get approved because the defaulted loans tanked your credit, you may be able to qualify for a personal loan with a cosigner. You can use the new loan to pay off your loans in default.
However, this approach only works if you have a plan in place for making your payments going forward. Otherwise, you risk compounding the issue by defaulting on the personal loan, too.
5. Set up a plan
When it comes to private loans in default, your options are limited. One of the best things you can do is contact your loan servicer, explain your situation, and communicate your determination to move forward. They may be willing to work with you to come up with a solution, such as temporarily reduced payments to help you get out of default.
Handling a default on student loans
If you’re struggling with your payments, take action now to talk to your lender and come up with a plan. Signing up for an alternative repayment plan or entering a temporary forbearance can prevent more serious issues from occurring later on.
Need more help? Learn about your options and rights when you default on private student loans.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.