If you have a history of making student loan payments on time each month, great job! Paying back student loans can feel stressful at times. However, the more you get it under control now, the better you’ll be in the long run. If you’ve accidentally forgotten a payment or two or are afraid you may miss a payment in the future, we understand that life happens. You may have heard of defaulting on student loans, but what does it really mean and how can you avoid it? Keep reading to learn more. [Note: Under the CARES Act, federal loan payments are suspended through May 1, 2022, and borrowers should prepare for resuming student loan payments at that time. If you’re already in default, the CARES Act also temporarily suspended collections activity.]
What Does it Mean to Default on Student Loan Debt?
When you do not make payments on your student loan debt for a specified period of time, your loan is in default. For federal student loans, if your loans are not in deferment or forbearance and you do not make payments for 270-360 days, the loan will be in default. If you have private student loans, the length of time is less. Generally, 120 days without payment on a private loan, and the loan is considered in default. Be sure to check your loan agreement for specific terms on when a loan is considered in default. To find out whether you have any federal student loans in default you can log in to your My Federal Student Aid account. There, you can find information regarding all federal loans you have, along with the servicer and the status of the loan. For information on any private loans and federal loans, you can pull your free credit report yearly to see if you have any defaulted loans reported there.
Consequences of Default on Student Loans
A default on a student loan, whether it’s a federal or private loan, can have severe consequences. However, some consequences only apply to federal loans. If you default on a student loan you could be facing:
- Collection – Your loan may be sent to a collection agency for payment. You may also incur late fees. This can apply to federal and private loans.
- Lawsuit – You could be sued by your loan provider for payment.
- Garnishment – For federal loans, your wages from your employer or Social Security payments you receive can be garnished to pay your loans. For private loans, the garnishment of your wages can be ordered through a lawsuit.
- Tax refunds intercepted – State and federal tax refunds can be intercepted to pay for federal student loans.
- Negative credit history – For most federal student loans, a default will remain on your credit history for 7 years, although Perkins loans will remain until they are paid in full or consolidated. For private loans, generally, a default will remain for seven and a half years. Although a default may not remain on your credit history, the loan may still be in collections for payment.
- Negatively impact your credit score – Your credit score will be impacted as long as the default is showing on your credit history. In fact, you may see a drop in your score as early as 90 days after your missed payments, since missed payments are reported on your credit history.
A low credit score and negative credit history can make it difficult to obtain financing in the future for things such as a car loan or mortgage. It can also impact you if you are applying to rent an apartment or applying for certain jobs.
How to Prevent Default
If you are having trouble making payments on your loan, there are some options to consider to avoid a default:
1. Deferment or Forbearance
For federal loans, deferment or forbearance are good options when you have a temporary hardship making your payments. The main difference is if you are in deferment, no interest will accrue to your subsidized federal student loans or Perkins loans. If you are in forbearance, interest will accrue on your loan balance. Most private student loans have an option to postpone payments, but the rules vary among lenders.
2. Refinance Student Loans
Both federal and private loans can be refinanced. When you refinance your student loan(s), you are obtaining a new loan to pay off your old loan(s). Refinancing student loans to a lower interest rate can reduce your monthly payment, as well as the amount you will pay for the loan in total. Refinancing can also be a great solution to combine multiple loans into one, so you only have to remember to make one student loan payment. If you are considering refinancing, it’s best to apply before you miss any payments on your current loan because minimum credit requirements must be met in order to qualify. Although each lender is different, generally a credit score in the 600s is needed for refinancing, along with a low debt-to-loan ratio, and a minimum length of credit history. At ELFI, a minimum credit score of 680 and a minimum credit history of 36 months are required, along with other requirements.*
3. Switch your Repayment Plan
If you have federal loans, there are different repayment plans that allow you to make payments based on your income to make your payment more manageable. Income-Driven Repayment plans will extend the length of your loan but will reduce your monthly obligation. Look at the Federal Student Aid website to see all available repayment plans for federal loans.
How to Fix a Default on Federal Student Loans
If you have defaulted on a student loan, it is most likely not feasible to pay the loan off in full to get the loan out of default. However, you can explore other options to get the loan out of default:
1. Loan Rehabilitation
Loan rehabilitation is when you agree in writing to make nine payments within 10 consecutive months to your student loan provider. The payment amount required is calculated by your provider and is based on your discretionary income. Once you make the required nine payments within 10 months, your loan is considered out of default.
2. Loan Consolidation
With this option, you consolidate your defaulted loan(s) into a new Direct Consolidation Loan. In order to take advantage of this option, you must agree to pay the Direct Consolidation Loan on an Income-Driven Repayment plan or make three, full, on-time payments to your defaulted loan before you can consolidate.
Bottom Line
Paying back your student loans can take work, but you have many options available to find the best repayment plan for you. As soon as you are having trouble making payments, seek out help so that you avoid missing or making late payments. You can also learn more about what happens when you stop paying student loans.
