Being unable to repay student loans can create extreme financial stress. As many young graduates work hard towards securing a career, an unstable employment market and rising cost of living can be a big financial squeeze.
As a result, many new graduates are falling delinquent or behind on their student loan payments, and some even find themselves defaulting on their student loans. In fact, only 54% of student loan borrowers are actively repaying student loans (source). Unfortunately, falling behind on student loan payments comes with both short-term and long-term negative effects.
Understanding the implications of a student loan default and delinquency can be an eye-opener, but there are a few simple ways to recover from student loan default and even avoid it altogether!
A Defaulting Economy
A student loan default occurs when you become more than 270 days past due (330 days for FFEL loans) on your student loan payments. If you didn’t set up automatic payments, recently changed your mailing address, or are simply struggling financially, you can inadvertently miss payments and find yourself getting hit with late fees and falling behind on student loan payments.
The term “default” is sometimes unclear to student loan borrowers. It shouldn’t be confused with student loan deferment or delinquency. A deferment is simply an option of putting your repayment on hold, while student loan delinquency indicates the failure to make required payments.
Defaulting on your student loans is a result of long-term delinquency and it can have a serious impact on your financial standing if it isn’t resolved immediately.
If you find yourself in student loan default, you’re not alone. In September 2014, the Department of Education reported 13.7%, or roughly 5.3 million borrowers, are in default.
The Effects of Student Loan Default
Defaulting on your student loans can lead to expensive collection fees of 16-25% (even up to 40% for Perkins Loans) of the total defaulted loan amount, the seizure of state and federal tax refunds, and wage garnishment. For the average borrower, collection fees can easily translate into several thousands of dollars.
The following are additional penalties that can occur from student loan default:
Adding to these penalties is the negative impact it can have on your credit. Student loan default can be a serious blow to your credit history and affect your future ability to obtain credit, such as a credit card, mortgage, or auto-loan. A negative credit history also leads to higher interest rates, making it even more difficult to recover financially.
How to Rehabilitate a Defaulted Student Loan
Borrowers who default on a student loan have a number of available options to help them recover. Student loan default rehabilitation is available, and many Income Driven Repayment plans can help you prevent a default from occurring.
In addition, completing a student loan rehabilitation program restores your eligibility for new financial aid if necessary. But most importantly, you can once again qualify for deferment and forbearance time should you need it in the future.
Student loan rehabilitation requires that you make a series of 9 consecutive on-time payments within a 10 month period. If a collection agency has been appointed by the lender, they can help you set up a payment plan that works for both parties.
Once you’ve met the requirements of your rehabilitation program, you’ll be on your way back to establishing good financial standing, reducing your debt, and repairing your credit.
If you don’t want to wait the 9-10 months for a proper rehabilitation, you can consolidate your defaulted loans through a Direct Loan Consolidation which will bring your student loans into good standing. The downfall of using a consolidation to rehabilitate your student loans is that your credit report will show a defaulted student loan or write off from the original lender.
Also, if you can only use the consolidation method once and on non-consolidated student loans, as you cannot consolidate an already consolidated student loan.
Preventing Student Loan Default
Prevention is always the best approach. Avoiding late payments is absolutely critical to your long-term financial well-being. Your personal and professional life can be impacted by student loan default, so avoiding it altogether should be your first objective.
Unforeseen financial circumstances can make it difficult to keep up with your student loan payments. Contact your student loan servicer as soon a financially significant event occurs that prevents you from making your payments, so that your servicer can assist you before you begin to lose your ground.
In addition, if you feel like your student loan payments are too high for your current financial state, consider your student loan refinancing options and Income Driven Repayment plans. These programs can be a great way to reduce the burden of your student loan in a way that doesn’t negatively impact your credit.
Although rehabilitation programs are available for student loan default, avoiding them altogether is the ideal solution. Unfortunately, life isn’t predictable. Financial hardships should be addressed as soon as possible, so that you can reduce your debt, avoid student loan default, and stay financially healthy.
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