How to Avoid Becoming One of the Million Americans in Student Loan Default

student loan default

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.

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