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.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
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1 Important Disclosures for SoFi.
2 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 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.54% APR (with Auto Pay) to 7.27% 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 March 18, 2019, 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 0318/2019. 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 firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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 2.5% effective February 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.54% – 7.12%3||Undergrad & Graduate|
|2.54% – 7.27%1||Undergrad & Graduate|
|2.67% – 8.96%4||Undergrad & Graduate|
|3.23% – 6.65%2||Undergrad & Graduate|
|2.54% – 7.43%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|