Defaulting On Student Loans
If your loan is in delinquency, that means you’ve failed to make a payment when it’s due. If you’ve defaulted on your loan, that means you’ve been delinquent for nine months or longer without making arrangements for either deferment or forbearance.
Words of Caution
- Student loans are not discharged through bankruptcy, so you can’t just claim financial hardship and be rid of them.
- If you miss a payment, 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 need to pay immediately. If you don’t, a default claim will be filed on your loan.
- When a default claim is filed, you most likely will receive an unpleasant call. Then if you do not negotiate some kind of repayment deal within 60 days, you will be reported to the national credit bureaus, which will damage your credit history. This could make it difficult to receive a credit card, mortgage, apartment, or future loans of any kind.
The Ramifications of Student Loan Default
- 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 depend on whether the loan is a federal or private loan, so check with your lender directly.
- 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.
- 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. Many lenders will even reduce your interest rate if you enroll in auto-payments, so you could even save money.
Creative Ways to Pay Back your Student Loans
With living expenses and tuition costs climbing faster than a mountain goat on a mission, it’s no surprise, then, that we’ve seen students doing some pretty crazy things to help cover the cost of college or pay down the debt they have after graduating. Steve Stanzak, a student at NYU, couldn’t afford a dorm room so lived in the campus library for eight months. Two University of Colorado students cashed in on the party scene by starting a cleaning service to spruce up after house parties. One guy even paid for his living expenses by spending his free time disco dancing in the street, shaking his way to $10,000 a year.
But not everyone can tackle their debt by confronting their crazy, so what can you do to help pay down your own? The secret: get creative without getting silly. And one of the best ways to do that for students with federal student loans is to consider a federal policy called loan forgiveness, which cancels some or all federal student debt in exchange for certain types of service. The good news is there’s something for everyone, so if you have the time and the ambition to lessen your debt, consider the programs below:
Volunteer: Peace Corps, AmeriCorps, or AmeriCorps VISTA
Volunteering isn’t just a great way to see the world or give back to your own community, it’s a great way to help tackle your debt. The best part about it is that many volunteer opportunities offered through these programs cover travel and living expenses in addition to offering other great benefits, like loan deferment while in service, a post-service stipend, or an educational award that can be used to pay down your debt when you’re finished. Peace Corps volunteers receive $7,425 after their 27 months of service and qualify for partial cancellation of any Perkins loans (15% off for each of the first two years of service, 20% for each of the third or fourth years if you extend your service). And both AmeriCorps and AmeriCorps Vista volunteers can get up to $5,550 for the completion of 1,700 volunteer hours over a ten month program.
Serve: Consider military service
While each branch of the military has a host of financial benefits, and there are many military and veteran associations that offer scholarships to those who’ve served, you should also be aware that students who enlist in the Army National Guard can qualify for up to $50,000 in student loan repayments, which is helpful to those who’ve incurred debt before enlisting.
Teach: Opportunities for teachers
Full-time teachers with a passion for helping those who need it most—that means students from low-income families or special education students—and teachers who specialize in shortage areas like bilingual education, math, and science qualify for the partial or complete cancellation of Perkins or Stafford loans they have. Visit Federal Student Aid for more information.
But the help doesn’t stop there! Other people who may qualify for partial or complete cancellation of their student loans include nurses and childcare providers. Check out the HRSA Nursing Education Loan Repayment Program for more information. Also for those employed in public service, the federal government will forgive any remaining debt after 10 years of full-time employment if you’ve made at least 120 payments. Check with your employer for eligibility.