The Consequences of Defaulting on Student Loans
The definition of default is not making payments on your student loans after 270 days and not making arrangements for deferment or forbearance.
You have accumulated a lot of student and loan debt and have yet to get that “million dollar” job. As a student, you are responsible for repaying your loans even if you move, ignore your monthly repayment bill, did not graduate, or have trouble finding a job after graduation. Also, student loans are NOT discharged through bankruptcy.
After a few weeks, you may receive creditor phone calls and notices. Your lender or servicer will make at least four phone calls and send four notices before sending a final demand letter (usually sent after five months of non-payment). The fifth letter will emphatically tell you that you pay immediately, and then a default claim will be filed on your loan.
Once a default claim is filed, you most likely will receive an unpleasant call and if you do not negotiate some kind of repayment deal within 60 days, you will be reported to the national credit bureaus.
Because you originally did not make an effort to repay your loan or apply for a deferment you have now established for yourself bad credit. Once you have bad credit, you are ineligible to receive a credit card, mortgage, apartment or car loan.
The Ramifications of Defaulting on Student Loans
- Your tax refunds may be withheld and used for payment.
- Part of your salary may be withheld if you work for the federal government.
- You may be sued and taken to court for the entire loan amount.
- You may be required to repay your debt under an income contingent repayment plan and thus repay more than the original principal and interest on your loan.
- You will not be able to obtain additional state or federal student aid until you make satisfactory arrangements to repay.
- You will be ineligible for deferments.
- You may not be able to renew a professional license.
- Make sure you understand your options and responsibilities before taking out a loan.
- Make your payments on time.
- Notify your lender or servicer promptly of any changes that may affect the repayment of your loan. If you move or change your address, let them know. Likewise tell them about name changes (e.g., because of marriage), graduation or termination of studies, leaves of absence and transfers to another school.
- If you encounter financial difficulties, consider applying for a deferment or forbearance on your loans. It is better to defer your payments than to go into default. Ask your lender about these options while you are still making payments, before you default on your loan. You won’t be able to get a deferment or forbearance after you default.
- If you are having trouble making payments, your lender may be able to suggest alternate repayment options, such as graduated repayment, income contingent repayment and income based repayment. The types of available repayment options currently depend on whether the loan was issued under the FFELP or FDSLP (Direct) programs.
- Consider using a consolidation loan to combine all of your educational loans into one big loan. This lets you send your payments to just one lender. You may also be able to extend the term of the loan in order to reduce the size of your monthly payments.
- Keep careful records regarding your loans. Put copies of all your letters, promissory notes, notices of disbursement and other forms in a file folder.
- If your lender offers auto debit payments, take advantage of them! It is an easy and free option that lets you forget about paying your student loan and authorizing your financial institution to pay your loan from your account each month, thereby preventing loan default from happening.
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