All You Need to Know about Student Loan Default

Student loan default arises when a borrower fails to adhere to the repayment terms outlined in their loan agreement. The specific timeline for default depends on whether the loans are federal or private.

Defaulting on a student loan carries significant repercussions. The entire loan balance may become due immediately, and options like forbearance and deferment may no longer be available. However, a temporary initiative called Fresh Start, administered by the U.S. Department of Education, offers assistance to help avoid these consequences for federal student loans.

When you miss your loan due date, your loan initially becomes delinquent. It remains in this state until you settle the owed amount, qualify for deferment or forbearance, adjust your repayment plan, or enter default.

After your student loan payment is 90 days overdue, your loan servicer will report the delinquency to the three major credit bureaus: Experian, Equifax, and TransUnion.

At this juncture, the transition from delinquency to default occurs, with the timeline contingent upon the type of student loans you hold.

For federal student loans, default typically occurs when you fail to make scheduled payments for 270 days. Perkins Loans, however, may be considered in default after missing a single payment.

Private student loans generally enter default status after missing three consecutive monthly payments or accruing a total of 90 days in delinquency.

Upon delinquency or past due status of your student loans, your loan servicer will typically notify you through various channels such as mail, phone calls, or emails detailing your late payment.

When your student loans transition into default, they should be reflected on your credit reports. You can access free weekly credit reports from the three major credit bureaus through AnnualCreditReport.com.

Additionally, you can check the status of your federal student loans, including any details regarding past-due, delinquent, or defaulted amounts, by logging into the Federal Student Aid website.

Entering default on your loan can lead to various consequences:

  • Difficulty obtaining credit approval: Defaulting damages your credit score, making it harder to get approved for credit cards, loans, mortgages, utilities, or insurance. You might face higher interest rates or require a co-signer for approval.
  • Immediate repayment: Federal student loans require immediate repayment of the entire unpaid balance and accrued interest through acceleration.
  • Loss of borrower protections and aid: Federal loans lose eligibility for deferment, forbearance, or repayment plan changes. You also become ineligible for additional federal student aid.
  • Legal action: Loan servicers can take legal action, resulting in potential wage garnishment. You may also incur court, collection, and attorney fees.
  • Academic impacts: Your school may withhold your academic transcript until your loans are out of default.

Throughout this process, late fees and interest will continue to accumulate, exacerbating the situation. Defaulting can have long-lasting effects on your finances and life. If you’re at risk of default or facing financial challenges, it’s crucial to address the issue promptly by contacting your loan servicer and exploring options to avoid default.

Aside from grasping the concept of student loan default, it’s crucial to learn how to rectify the situation. If you’ve already defaulted on your student loans, there are avenues to regain good standing.

Typically, there are three primary avenues for rectifying federal student loan default: paying off the entire loan balance, opting for loan rehabilitation, or applying for loan consolidation. Given that paying off the entire balance upfront is often impractical, most individuals turn to rehabilitation or consolidation as feasible options.

However, a temporary initiative called Fresh Start offers additional assistance.

Fresh Start

Fresh Start is a relief initiative for defaulted federal student loan borrowers, available until September 30, 2024. Administered by the U.S. Department of Education (ED), it requires contacting your loan holder, whether the ED or a guaranty agency, to enroll.

Under Fresh Start, you can have your federal loans removed from default, along with these benefits:

  • Regaining access to federal student aid.
  • Transferring your loan back to a loan servicer.
  • Eliminating the default from your credit report.

Furthermore, you may opt for an income-driven repayment plan, where your monthly payment is determined based on your income, potentially as low as $0. This option can be particularly helpful if your default stemmed from a lack of income.

Federal Loan Rehabilitation

Presently, loan rehabilitation is temporarily suspended in favor of the Fresh Start program. Typically, initiating federal loan rehabilitation involves contacting your servicer. During this process, you’re required to:

  • Make nine affordable monthly payments, as stipulated by your loan holder, within 20 days of the due date, and agree to these terms in writing.
  • Complete all nine agreed-upon payments within ten consecutive months.

The monthly payment is typically 15 percent of your discretionary income, calculated as the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence. Consequently, payments during rehabilitation can be as low as $5 per month.

Consolidation

Federal student loan consolidation involves merging your existing federal student loans into a new one. To qualify for this option with defaulted loans, you must either:

  • Commit to enrolling your new Direct Consolidation Loan in an income-driven repayment plan.
  • Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidating.

However, this approach does not erase the default from your credit history.

Private student loans operate under different guidelines. Should you find yourself in default with private student loans, there are alternative avenues to explore. One option is negotiating a settlement on your debt with the collections agency. Additionally, you can attempt to collaborate with your loan servicer to bring your payments up to date; initiating this process involves reaching out and providing an overview of your circumstances.

For those grappling with unmanageable private student loan debt, seeking assistance from a student loan lawyer is a common recourse.

After taking measures to lift your student loans out of default, it’s crucial to prevent a recurrence of the same issues. Your priority should be securing a manageable monthly payment that doesn’t strain your finances.

Consider the following strategies:

  • Explore income-driven repayment plans, allowing you to pay a portion of your discretionary income towards your loans over 20 to 25 years.
  • Refinance your student loans through a private lender to obtain a reduced interest rate and more feasible payment. However, exercise caution with federal loans as this could render you ineligible for future programs like Fresh Start.
  • Select from federal student loan repayment plans (for existing federal loans), potentially extending your repayment period to 30 years.

Additionally, establish a solid foundation for managing your student loan payments by devising a monthly budget that accounts for all your expenses. Minimize discretionary spending to create additional flexibility in your budget. Lastly, consider automating your student loan payments to ensure timely payments without fail.