Student loan debt has become so serious that more borrowers have defaulted on their student loans than ever before.
Rohit Chopra, a senior fellow at the Consumer Federal of America, crunched the numbers on student loan default. His analysis revealed that 1.1 million students defaulted on their Direct Loans last year. From 2015 to 2016, the number of borrowers in default increased by 17 percent.
These stats don’t even include borrowers with student loans other than Direct Loans, such as private student loans. Clearly, even as important numbers such as the unemployment rate improve, graduates are still struggling to handle their burdensome student debt.
What happens when you default on student loans?
Going into student loan default can make a bad financial situation even worse. Learn about the consequences of default so you know why you need to avoid it at all costs.
1. Your credit takes a hit
Your student loan is officially considered to be in default when you go 270 consecutive days without paying. At this point, the loan servicer springs into action to collect payment.
First, your defaulted student loans are reflected on your credit report. Your report will show a delinquent account and your credit score takes a hit as a result.
A poor credit score can make it difficult to rent an apartment, get approved for student loan refinancing, or take out a mortgage or car loan.
2. Debt collectors start calling
Second, your loan goes into collections. Once it’s in collections, debt collectors could call you at all hours of the day to collect repayment. Debt collectors might even call friends, family, or your workplace to get in touch.
Don’t let debt collectors bully you, though. Learn how to protect your rights if you do have an account in collections.
3. The government garnishes your wages
The government can also garnish your wages, tax refund, and even Social Security benefits if you default. In fact, up to 15 percent of your disposable pay could be garnished and put it toward your loans.
Unfortunately, wage garnishment often doesn’t help reduce your loan debt much. More often than not, garnished wages pay down interest, leaving the loan principal untouched.
So if you had trouble paying before, defaulting on student loans will only make the debt less manageable. Unpaid debt continues to grow thanks to compound interest.
How to avoid student loan default
Many students default under the impression that the government will eventually discharge all student loans. While the debt crisis is severe — collectively, borrowers owe $1.3 trillion — all that debt won’t just go away.
Here are the steps you can take if you fear you’re in danger of defaulting on your student loans.
1. Ask about income-driven repayment plans
Most borrowers who go into default don’t make enough money to handle their student loan payments. Chopra found that federal debt has grown 16.5 percent since 2013 and borrowers owe an average of $30,650.
If you can’t make your monthly payments, ask your loan servicer about an income-driven repayment plan. The government offers a number of repayment plans for borrowers who can’t afford their student loans.
Programs such as Income-based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) cap your monthly payments at 10 to 15 percent of your discretionary income. After 20-25 years of on-time payments, any remaining student loans will be forgiven. So there is a light at the end of the tunnel.
2. Consider loan deferment or forbearance
If you can’t afford your loans, you might be able to pause repayment. You would need to request either deferment or forbearance.
To qualify for deferment, you must fulfill certain requirements. Being enrolled in graduate school or facing unemployment would both count. Depending on your circumstances, your loans may or may not continue to collect interest during deferment.
Forbearance is your other option if you’re facing financial hardship. If granted, you can pause repayment for up to 12 months. However, all your loans will keep collecting interest.
Borrowers should be very cautious about both these options. When left unpaid, student loans can grow insurmountable over time.
3. Look into loan forgiveness programs
If you’re still figuring out your career, consider one that qualifies for loan forgiveness. The Public Service Loan Forgiveness program, for instance, forgives loans after 120 payments (beginning after October 2007). You need to work in a government agency, non-profit, or other qualifying organization.
The government also offers forgiveness programs for certain occupations, like teaching and nursing. Plus, states have forgiveness programs for people in a variety of professions.
You’ll need to commit a certain number of years to working in a qualifying facility or area. But if your loans are already in default, they typically won’t qualify for loan forgiveness.
What to do if you’re already in student loan default
If you’ve already gone into default with your student loans, you have options to get out:
- Rehabilitation: A loan rehabilitation program will cap your monthly payments at 15 percent of your income. After 10 months, you’ll be out of default.
- Consolidation: With a Direct Consolidation Loan, you’ll pay a single monthly payment with a fixed interest rate. Before you can apply, you must make three on-time monthly payments.
Once you’re approved, you’ll be out of default. And your new plan will be based on your income, so the monthly payments shouldn’t be too burdensome.
Dealing with the student loan crisis today
If your loans feel insurmountable, speak with your lender about income-driven repayment plans. And if you’re already in default, find out what you can to do to rehabilitate your loans.
Even though defaulting on student loans is more common than ever before, the decision to do so ultimately hurts you more than anybody else.
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 email@example.com, 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|