Federal Student Loan Default

Federal student loans are used to fund education expenses and must be repaid with interest. It is important to seek student loan aid if you find you risk suffering the consequences of defaulting on your financial responsibility.

Student loan default is the result of chronically missing student loan payments and can have severe consequences. To avoid these consequences, carefully review the following sections to learn the impact of student loan default and how to get student loans out of default before they seriously impact your credit history.

What is student loan default?

What is student loan default? When a borrower defaults on a loan, it means that he or she has stopped making payments according to the requirements agreed to on the promissory note. Federal student loan default is a serious problem in America. According to U.S. Department of Education data, more than 3,000 borrowers default on their federal student loans every day. Student loan default increased 17 percent from 2015 to 2016 and the trend continues.

Loan delinquency is the first step leading to student loan default, and a loan is considered delinquent the first day after a payment is missed. The period of delinquency that precedes student loan default status will vary according to the type of loan you have. You will not reach student loan default status with a Direct Loan or Federal Family Education Loan (FFEL) until you have failed to make payments for 270 days, or approximately nine months. With Federal Perkins Loans, the loan servicer may have the right to declare student loan default if you fail to make any payment by the scheduled due date.

Related Article: Student Loan Interest Rates

Some students may find themselves in student loan default because they wrongly assume that they do not have to continue making loan payments after dropping out of college or switching schools. Parents may end up in student loan default if they took out a Direct Parent PLUS Loan and stopped paying after their child failed to complete college. Others need student loan default help because of unemployment, prolonged illness or another crisis that seriously impacts their ability to keep up with student loan payments. In this case, you should contact your loan servicer well before your account reaches student loan default status.

Consequences of Student Loan Default

What happens if you default on your federal student loans? The consequences of defaulting on student loans are steep and can affect every area of your life. If you fail to seek student loan default help in time, many of the following consequences could happen:

  • Your remaining loan balance, plus interest, becomes due immediately
  • You can no longer get student loan default help by requesting deferment or forbearance
  • You lose eligibility to get financial aid in the future
  • Tax refunds, federal benefit payments and wages can be garnished
  • The government could foreclose your home
  • The loan holder can take you to court
  • Your credit rating is damaged, affecting your ability to get a credit card, buy a car or rent a home
  • Student loan default on a credit score interferes with your ability to get a job, open utility accounts or get insurance coverage
  • Your ability to buy or sell assets, such as real estate, may be blocked
  • Your school may withhold your academic transcript until your student loan default is satisfied

How to Get Student Loans Out of Default

There are several options for getting out of student loan default if you have failed to make payments for a period. The first option for getting out of federal student loan default is to pay the remaining loan balance in full. However, this form of student loan default help is not feasible for most people who find themselves in default.

Loan rehabilitation is one common answer to the “How to get student loans out of default?” question. To try this form of student loan default repair, follow these steps:

  1. Contact your loan holder or servicer and explain that you want to get your loan out of default
  2. Negotiate what you both feel are reasonable and affordable payments, and agree in writing to make nine of them, voluntarily, within 20 days of the due date.
  3. Make all nine payments over a period of 10 consecutive months.

In most cases of resolving student loan default via loan rehabilitation, lenders will determine your reasonable new payment by taking 15 percent of your annual discretionary income and dividing it by 12. You must provide your most recent tax returns to the lender to verify your annual income. Loan rehabilitation is a good way to resolve student loan default because it stops any wage garnishments, and you regain benefits such as having a choice of repayment plans or deferment. In addition, the record of student loan default will be removed from your credit history, although late or missed payments prior to the default will still appear on your credit report.

Another choice for student loan default repair is loan consolidation. This method of fixing a student loan default situation involves consolidating, or combining, the defaulted loan with other federal student loans into one, more manageable monthly payment. When getting a loan consolidation for federal student loan default repair purposes, you must agree to repay your new consolidated loan under an income-driven repayment plan or make three full, consecutive, voluntary and on-time payments on the defaulted loan before consolidating it.

How to Avoid Student Loan Default

You can take steps to avoid federal student loan default, such as staying on top of your loan information and staying in touch with your loan servicer if you begin to have trouble paying your bills on time. Never ignore delinquency or student loan default notices from your lender. Loan servicers want to help you stay out of student loan default and may allow you to change your payment due date, negotiate a lower monthly payment plan or instruct you in applying for a deferment or forbearance.

One of the best ways to avoid student loan default is to not borrow more money than you can realistically expect to repay. A good guideline for student loan default prevention is to research the salary you can expect to earn during your first year after college and try not to borrow more than that amount. You may be offered a much larger loan than you can repay. To avoid future student loan default, ask for a smaller loan instead of simply accepting the larger sum.

If you need federal student loan default help, first try to qualify for a better repayment plan. Your loan servicer can tell you about options for lowering your monthly payments and other ways to make repayment more manageable.

Related Article: Federal Student Loan Deferment

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