Defaulting on Student Loans
The definition of default is not making payments on your student loans after 270 days after your six month grace period after graduation 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 student 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 receive creditor phone calls and notices. Your lender 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, your case will be turned over to a guaranty agency. 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 bureau. 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.
Preventing Default
- Make sure you understand your responsibilities and seriousness of debt before taking out a loan.
- Repay on time.
- Notify your lender or servicer immediately of any changes that may affect the repayment of your loan including any name, address or telephone changes, leaves of absence, school transfer, graduation or termination of studies. If you experience financial difficulties, apply for a loan deferment or forbearance. It is better to defer your payments than to go into default. Ask your lender about these options before you default on your loan and while you are still making payments. You won't be able to get a deferment or forbearance after you default.
- If you are having trouble making payments, talk to your lender about alternate repayment options, such as graduated repayment, income sensitive repayment and income contingent repayment. The types of available repayment options currently depend on whether the loan was issued under the FFELP or FDSLP (Direct) programs.
- Consider a consolidation loan where you would combine all of your educational loans into one big loan. This type of loan lets you send your payments to just one lender and you may also be able to extend the term of the loan in order to reduce the size of your monthly payments.
- Organize your records in a file folder where you can arrange copies of all your letters, canceled checks, disbursement notices, promissory notes, and other pertinent forms.
- If your lender offers auto debit payments, take advantage! 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 to occur.
