If you are struggling to make your monthly loan payments, you are not alone. Various reports indicate that the number of students struggling with student loan debt is increasing every year. Every student may have a different reason as to why they default on their loans. The reasons don’t matter, though. Regardless of why you defaulted on your loan, the consequences could be severe, pushing you further into debt.
This article discusses what is student loan default, the common reasons for student loan default, the consequences of defaulting and what you can do to avoid it.
What Is Student Loan Default?
Failure to pay back your student loan can result in a default on your student loans. This usually starts off as a late or missed payment. When you miss one payment, your student loan is considered to be delinquent.
Your federal loan goes into default if the loan amount remains unpaid for 270 consecutive days.
Private loans can go into default at any time after the missed payment.
Common Reasons For Student Loan Default
Understanding the common reasons for student loan default and delinquency will help you recognize the signs that indicate you may be headed that way. Recognizing that you are at risk for default can help you take preventive measures before you get into default.
Here are some of the more common reasons why people default on their student loans:
- They are on such a tight budget every month that the smallest unexpected expense can throw their finances into disarray. Other urgent payments, such as rent, electricity, food, transportation, and other everyday essentials, means loan payments often get overlooked or simply ignored.
- An increase in interest rates or monthly payments can derail a budget that was working well beforehand.
- Difficulty finding a high paying job or getting laid off from their current employment.
- Dropping out of college, making it even more difficult to find steady employment.
- They were the victims of student loan scammers.
- Missing a few payments and finding it difficult to catch up.
- Automatic default if their co-signer declares bankruptcy or dies.
What Happens If Your Student Loan Goes Into Default
The consequences of defaulting will vary depending on several factors. The most important factor is how long you’ve been in default.
If your student loan goes into default, these few things could happen:
- It will impact your credit score negatively, making it more difficult for you to get any other loan in the future. The longer you are in default, the worse your history will be hit.
- The lender may impose huge late payment fees, several times in excess of what you would owe if all payments were made on time or they could sue you for collections.
- You could lose your professional license, making it difficult to get a job that you are actually qualified for.
- Your employer could garnish income and other perks and your retirement benefits could be at risk.
- Your tax refunds could be withheld for several years.
- You are likely to become ineligible for federal repayment flexibility.
- Putting your co-signer’s credit history at risk.
- You cannot discharge student loans through bankruptcy so this is not an option you can fall back on.
What You Can Do To Avoid Student Debt
As soon as you realize that you are at high risk of a student loan default, you must speak to your lender to find out your options. With several years of experience dealing with similar situations, they are in the best position to give you solid advice on how to proceed. Don’t be reluctant to speak to your lender for fear that there may be repercussions. They won’t be any. In the end, lenders want to get their money back and want to make it easy for you to do so.
Your lender may suggest a few alternate repayment plans that may reduce your financial burden. Hopefully, it makes it easier for you to make your monthly payments on time.
- One alternate payment plan that is definitely worth considering is an income-based repayment plan. It pegs your monthly payment to your monthly income.
- A graduated repayment plan is another that is worth considering. This plan starts off with lower monthly payments when you just start off. This amount increases gradually. The idea is that you earn less when you just graduate but your earning potential and hence your repaying potential increases after a few years of experience in the work field.
- The third option is an extended repayment plan, in which you make minimum monthly payments. You should know however that while this plan may ease your financial burden for the moment, it extends the life of your loan, which means you will end up paying a substantial amount by way of accrued interest for the additional period.
If none of the above repayment plans help your situation, other alternatives that you can consider are loan consolidation, loan refinancing, deferment or forbearance.
With loan consolidation, you consolidate all of your student loans into one loan, which means you only have one due date and one payment amount to remember, minimizing the chances of forgetting. You should only consider this option if the interest rate of the consolidated loan works out to be lower than the original interest rate.
Refinancing is an option that some lenders offer if your payment record has been stellar thus far. If you think you may qualify for refinancing, you must look around for the best rates as they may differ from one lender to another. You could also lose out on benefits associated with your original loans and that is something you must look into before choosing this option.
With a deferment or forbearance, you can delay your payments for a period of 1 to 3 years. Before choosing deferment or forbearance, you must make sure you understand the eligibility criteria and as well as the terms, conditions, and repercussions of choosing any one of these options.
The consequences of student loan default can be far-reaching and can haunt you for life. Finding out all of your options in advance will help take the right decisions before the default happens. There are several alternatives you can look into. Speaking to your lender is the best place to get started.
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