When taking out a student loan you should know that you are undertaking a promise to repay, irrespective of whether you graduate successfully, have difficulty finding a job, or choose to withdraw from college. Defaulting on federal student loans can cost you much more than the amount you originally borrowed. However, there are ways to avoid default and steps you can take to get out if you are already in default.
You are in default if you miss your monthly payments for 270 days and have no arrangements to get a deferment or forbearance from your lender. There are serious consequences on a student loan default.
The price you pay on a student loan default
Defaulting adds other costs apart from the outstanding amount on your loan. You may end up paying 25% to 50% more than the principal loan along with interest. When you default, your loans may be handed over to a collection agency. The price you pay for default include:
Collection agency's collection costs, including court costs and attorney fees
Late payment charges and interest accrued
Sued for the entire loan amount
Garnishment of wages up to 15% of your take-home pay
Ineligibility for deferments
Interception of your federal and state income tax refunds
Denial for further federal aid
Withholding of part of Social Security benefit payments
Damaging your credit score
Refusal for federal interest benefits
Refusal for renewing a professional license, if you hold one
Avoiding a student loan default
An understanding of the terms and conditions of your loan along with keeping your payments on track will avoid any possible default. There are a number of ways in which you can prevent a loan from defaulting:
Do not borrow more than you need
Understand your re-payment options and responsibilities before taking out a loan
Keep your student loan documents including letters, promissory notes, and cancelled checks in a file folder
Set up an automatic electronic payment system or reminders for your payment dates
Let you lender know of any change in your personal details effecting your loan payments, such as name, address, transfers to another school, and graduation or termination
In case of financial difficulties in repaying your loans, consider applying for a deferment or forbearance
Ask your lender for alternate repayment options. Most lenders provide graduated repayment, income sensitive repayment, income contingent repayment, and income-based repayment options
Consolidate all your different education loans into a single loan with a single payment
What to do if you default
If you default on a student loan, try to work a repayment plan within 60 days of default, in which case some collection agencies will waive or reduce their collection fees. If you make six consecutive full voluntary on-time payments, you are entitled to an additional Title IV aid. After paying 9 of 10 consecutive payments within 20 days of the due date you can receive "rehabilitation", which means you are no longer considered in default.
Until 90 days after the default, the lenders do not need to file a default claim. Therefore, if a borrower brings the delinquency within the 90-day period, the lenders can cure the default. As a result, you have a chance for a cure until about three months after your default occurs.
Consolidation of your delinquent loan before the lender files for a default claim is an effective technique. Consolidation is a new loan that pays off the delinquent loan and frees you from default status.
A student loan is a facility that helps you pursue your dreams, but at the same can give you nightmares if you default. It is always advisable to take prompt action and minimize the risk of default.
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How EdFed Helped others!
You were so helpful during my loan consolidation. I didn’t know how I was going to figure everything out and get something turned in by July 1st, but my loan advocate told me to relax and walked me through the process in no time. Even though he was extremely busy, he took the time to answer all of my questions and had everything complete in time to take advantage of the low interest rate and save me nearly $20,000. Thanks EdFed. - Brianna L. Seattle, WA
While you are attending school and after you graduate, be sure to establish and protect your good credit rating. Make all loan and other payments on time; use cash instead of credit cards; and monitor your spending habits.
