Sometimes when the weight of student loan debt becomes overwhelming, it’s almost easier to pretend it doesn’t exist.
And while that can certainly feel better momentarily, pretending for too long could lead to student loan default. And that leads to even more debt and a damaged credit score.
If you’re facing student loan default, you’re not alone. According to Time, 8 million borrowers (or 1 out of 6) are in default on their federal student loans. But you have options if you default — and there are precautions you can take to stop it from happening in the first place.
Here’s what happens when you default on a student loan, what to do about it, and how to prevent defaulting on student loans if you’re on the brink.
Signs you’re at risk of defaulting on student loans
Financial hardship doesn’t always enter with a bang. Often, we think we’re doing okay, but the financial house we’re building is just a house of cards. One swift breeze and the entire thing could tumble down.
There are ways to see it coming, though. The risk of defaulting on student loans increases if one or more of the following applies to you:
- Your monthly budget is so tight that one unexpected expense can derail the whole thing.
- Your interest rate or monthly payment has increased, but you were already barely able to make your payments.
- You’re finding that it’s becoming harder and harder to make your monthly payments in full and on time.
- You’ve already missed a few payments.
- Your co-signer has declared bankruptcy or died — which can lead to automatic default.
If you’re experiencing any of these, don’t panic. There are steps you can take now to regain control of your loans.
How to prevent a default on student loans
If you think you’re careening toward student loan default, you can still take some of the steps below to swerve away in time. Your options will vary based on the type of loans you have.
Make a payment
If you’re already late on a payment, it’s not too late to salvage the situation. Although student loans are considered to be delinquent as soon as you miss a payment, federal student loans don’t officially go into default until they’re unpaid for 270 days.
Private student loans, on the other hand, don’t have quite this much of a buffer. Since private lenders treat them similarly to other loans, private student loans can go into default as soon as they go unpaid.
Either way, if you have the money to make a payment, make it right now. Federal lenders report student loan delinquency after 90 days. Private lenders can report it at any time.
And if a default hits your credit report, the wheels can start falling off the bus. It’s hard enough to face the financial consequences of student loan default — but the damage it can do to your credit score can be just as far-reaching (more on that below).
Apply for deferment or forbearance
If you don’t have the money for a payment, you might be able to suspend your payments through deferment or forbearance.
Both of these options halt your payments for a limited time, but with forbearance, interest will always accrue during that period. (You can use our student loan deferment calculator to see the impact this will have on your loans.) Interest might not accrue during deferment if you have subsidized loans or Perkins loans.
As for which option you should pick, a private lender might only offer forbearance. For subsidized federal student loans, deferring if you’re eligible is ideal, since you can avoid accruing interest during that time.
If you qualify for economic hardship deferment or unemployment deferment, you can utilize them for up to three years.
As for forbearance on your federal loans, you can be eligible for mandatory forbearance if you have Direct, FFEL, or Perkins loans, and if your monthly payment is at least 20 percent of your monthly gross income. This is available for up to three years. You can also request general forbearance for financial difficulties, but in this case, approval is at the discretion of your lender.
Apply for an income-driven repayment plan
There’s no question that deferment and forbearance are effective options if you’re on the verge of student loan default. But if you think this is an issue you’ll have for more than a year, then it might be time to look at income-driven repayment plans.
Income-driven repayment plans are only available for federal student loans (except for loans given to parents), and they reduce your monthly payment to a certain percentage of your income. These plans also qualify you for student loan forgiveness after a specified amount of payments, which vary by plan.
If you decide to apply for an income-driven repayment plan, keep this in mind:
- You’ll have to reapply each year. And you’ll want to give yourself enough time to gather paperwork and submit it before the application is due.
- Any amount of student loan debt forgiven under these plans might be considered taxable income.
So what are the plans, and which ones could work for you? It all depends on the types of loans you have and when they were disbursed. The income-driven repayment plans are as follows:
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
- Income-Sensitive Repayment Plan
- Pay as You Earn Repayment Plan (PAYE)
- Revised Pay As You Earn Repayment Plan (REPAYE)
Here’s a guide to help you find the repayment plans you may qualify for:
You can find more information and apply for one of these plans via Federal Student Aid’s website. And you can see what each of these might save you with our following calculators:
- Income-Based Repayment Plan calculator
- Income-Contingent Repayment Plan calculator
- Pay As You Earn Repayment Plan calculator
- Revised Pay As You Earn Repayment Plan calculator
For private loans, talk to your lender
It’s unfortunate that private student loans don’t come with income-driven repayment plans, but that doesn’t mean private student loan borrowers are without options.
Talk to your lender to see what kind of financial hardship options they offer. It’s likely that forbearance will be one of them, but they might also offer other plans or options that aren’t widely advertised. You lose nothing by having the conversation.
Consolidate your loans
Let’s say things aren’t that serious yet, but you feel that now is the time to make a change. If you have federal student loans with various servicers, consolidation could help.
Federal student loans can be consolidated via a Direct Consolidation Loan. Not only does this loan group all your monthly payments in one, it will also bring you down to only one (preferably lower) fixed interest rate. And it will make you eligible for income-driven repayment plans which you might not have qualified for before.
This loan can also extend your time to repay for up to 30 years, which could lower your monthly student loan payment. While incredibly helpful when you’re struggling to make payments, it’s worth noting that staying in debt longer can cost you more in the end. But for those trying to make ends meet right now, this can be a game-changer.
Consolidation isn’t without its downsides. If you’ve already made headway on payments made under income-driven repayment plans so you can achieve student loan forgiveness (including Public Service Loan Forgiveness), this loan will remove the progress you’ve made so far. And if you currently take advantage of things like interest-rate discounts or rebates on your principal balance, you could lose those benefits.
If you think this is the right move for you, you can fill out the Federal Direct Consolidation Loan application.
Refinance your loans
Finally, an option for both federal and private loans: student loan refinancing.
Refinancing your student loans is similar to consolidating them. You would combine all your loans (or those you choose to include) into one new loan. You can even refinance federal and private student loans together. Ideally, the new loan will come with a lower interest rate than what you’re paying now. This can both simplify your monthly repayments and potentially save you money on interest or shrink the size of your payment.
However, refinancing federal student loans involves buying them out with private student loans. And that means you’ll lose access to federal forbearance and deferment, income-driven repayment plans, and federal student loan forgiveness.
That said, it might be worth collecting refinance offers to see if it makes sense for you. You can do this without taking a hit to your credit — most lenders only start with a soft credit pull, which doesn’t affect your credit score.
After you’ve collected your offers, use this refinancing calculator to compare your current payoff trajectory with that of the new loans for which you could qualify.
What happens when you default on a student loan
Now that you know some of the ways to avoid defaulting on student loans, let’s get into what happens if you do default.
There are a variety of consequences, and their occurrence depends on how long you’ve been in default.
- You’ll lose eligibility for federal repayment flexibility.
- You’ll become ineligible for student loan repayment assistance programs (LRAPs).
- Your credit score will take a hit that will worsen as the student loan default does.
- You could be charged large, egregious fees.
- You could be sued for collections.
- Your wages could be garnished, your tax refunds could be withheld (for multiple years if necessary), and even your retirement benefits could be at risk.
- You could lose your professional license.
- Any co-signers involved will experience damage to their credit scores.
As you can see, defaulting on student loans is not something to be taken lightly. If you’re feeling overwhelmed by your loans, ignoring them will only worsen the situation.
Remember, unlike other types of debt, student loans are notoriously difficult to discharge through bankruptcy. If you’re in student loan default, regain your control of the situation now before things escalate beyond your reach.
What to do if you’re in default on student loans
At this point, you know enough about what happens when you default on a student loan, so let’s talk about how to fix it. First, here’s what to do if you default on student loans that are federal.
Federal Student Aid lists three options for getting out of federal student loan default:
- Enter loan rehabilitation.
- Consolidate your loans.
- Repay your loans in full.
It’s probably safe to say that most people won’t be able to achieve the third option, so let’s discuss the first two.
The Direct Consolidation Loan, as mentioned above, is one choice for exiting default, but if you go this way, you must first either agree to sign up for an income-driven repayment plan or make three consecutive, on-time, full payments on your loan. Even if you do this, the record of your student loan default and the late payments will remain on your credit report for multiple years.
Your other option is student loan rehabilitation. With student loan rehabilitation, you would contact your servicer and agree in writing to make nine monthly payments within 20 days of your due date for 10 consecutive months.
But don’t worry, the payments don’t have to be the full monthly amount you were already having trouble making. Instead, it will be 15 percent of your annual discretionary income divided by 12. The payment can be as low as $5 per month.
If you choose to rehabilitate your loan, then your credit history will no longer show the default, but it will show the late payments reported by your servicer.
Unfortunately, there are no such options for most private student loans in default, according to Student Loan Borrower Assistance. If your loans are private, the best thing to do is contact your lender and ask them what you can do.
If there aren’t many options, consider refinancing your private student loans or trying to settle them with your lender if you have a lump sum of money you can afford to pay at once.
Student loan default: It’s not just you
Student loan default isn’t easy to navigate — but it’s also not something to beat yourself up over. If you’re in default on student loans, know that you’re not alone.
Don’t forget how typical student loan default is — and nowadays this is especially true if you attend a for-profit or community college.
Data from a report done by The Brookings Institution in 2015 compared what they consider to be traditional and nontraditional students who left school in 2011. They found that 21 percent of those who attended for-profit college and community colleges (“non-traditional”) were in default on student loans within two years of leaving school. That’s 13 percent more than those who graduated from four-year colleges and universities the same year.
So why the higher rate of student loan default for non-traditional students? The report showed that this cohort was less likely to finish their degrees and also less likely to find work after school. That can make repayment of student debt a tough challenge.
But even if you were a traditional student, you could be facing a similar conundrum. And those who found gainful employment could be earning far less than they need to afford their student loan payments. Although it’s a difficult situation for all who encounter it, you can remedy your student loan default if you follow the steps above.
And if you’re feeling overwhelmed, start here. You’ve already done the most important step of doing your research. Now all you have to do is consider which of the options above could work for you, and then contact your lender or servicer to get the ball rolling. After that, it’s just one day at a time.
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