In September 2012, the U.S. Department of Education released data showing that 13.4% of students defaulted on their federal student loans within the first three years of their payments. For those attending for-profit-colleges, that rate rose to 22.7%.
This rise has much to do with the increase in tuition rates and family income going down. Just in the past five years, the number of students seeking federally guaranteed student loans has increased by 1/3. That means there are approximately 37 million individuals with a federal student loan. Of that 37 million, 5.9 million are in default for a total balance owed of $76 billion.
In other words, you are not alone if you have defaulted on your student loan.
What is important is that you do what you can to get it back on track or there will be consequences that you may not be able to afford.
Consequences of Defaulted Student Loans
When you default on a federal student loan, it is most likely around 270 days past due. If your loan is one other than a federal loan, it is possible for it to default sooner. While 270 days seems like a while, it really isn’t and the consequences of defaulting can have a long-term impact.
Here are some of the consequences of a defaulted student loan:
- Your outstanding balance may include collection fees
- You may be required to pay the entire loan balance in full (not good for loans that are tens of thousands of dollars)
- Your paycheck can be garnished for up to 15% of your earnings
- You may lose your state and federal tax refunds, social security, and disability income
- You will lose eligibility for any other type of federal aid
- You will not have forbearance or deferment options, which you can take advantage of when certain circumstances are met
- Unpaid interest and outstanding fees can be added to the principal
In addition, your credit is going to be negatively impacted. You may not be able to acquire credit cards, leases, home loans, or a car. If you have existing loans and credit cards, your interest rates could increase. You may even be refused the ability to open a checking account at some banks. If you are allowed credit by a financial institution, they may charge you very high rates and your car or home insurance company could charge you more based upon creditworthiness. For some, they cannot even obtain a good job if they have bad credit.
Deferment and Forbearance
It is important to take advantage of deferment and forbearance when you can because you can’t when it’s too late. If you just started missing payments, it is possible to suspend your payments.
To defer your payments, there are different types that you may qualify for. If you are still in school, you can defer them. You can also defer if you are unemployed, are in the military, are undergoing rehabilitation training, or you fall within another qualifying category. Other criteria includes having some kind of economic hardship or being unemployed. If you meet the criteria for your specific type of deferment, you cannot be denied. During this deferment period, the federal government pays the interest that accrues on the loan, if it is subsidized. Unsubsidized loans do not qualify for interest payments by the government and that means interest on deferred loans can increase the amount owed.
If you do not meet the deferment criteria, you may be able to opt for forbearance. In many cases, whether or not you are granted forbearance is going to depend upon the lender, as it is reserved for those individuals who are sick or undergoing a financial hardship. Also, the loan, whether subsidized or unsubsidized, continues to accrue interest and that interest is added to the principal at the end of the forbearance period. In other words, the amount you owe is increased. This is, however, a way to avoid default or fix a default that is about to happen.
Alter Your Repayment Schedule
You can also alter your repayment schedule or even consolidate loans. You can consolidate multiple loans into one and this will reduce your rate and also reduce payment. This makes a lot of sense for those simply needing a lower payment amount.
For those with Grad PLUS, Stafford Loans, and Direct Loans, there are a number of options:
- Standard – Paying the least interest
- Extended – Extending the repayment period to lower monthly payments
- Graduated – Pay less now and more later
- Income-contingent (Direct Loans) – You can change your plan based upon income
- Income-sensitive (Federal Family Education Loans) – Choosing a percentage of income to be the loan payment
- Income-based – Reserved for those with low incomes needing low payments
- Consolidation – All loan types may allow for consolidation of multiple loans
Unless you are switching to an income-based repayment, loan repayment schedules can only be changed once per year.
You also have options if you have been impacted by a federal disaster. For those that become teachers, engage in public service, or have Perkins loans, it is possible to have part of the student loan forgiven, which will lower payments and help you get it back on track. You do have to hold your position for a specific amount of time (i.e teachers for 5 years) and may have to be working full time. You can speak with your loan provider to obtain a list of the occupations that may make you eligible for loan forgiveness. Forgiveness also cancels the interest for that portion of the loan. Just make sure you apply as soon as you are eligible to or you may not be able to have the loan forgiven.
Loan Rehabilitation
One other option is loan rehabilitation, which is a route that may take depending upon how far into default they are. You contact your guarantor and then make 9 consecutive payments on-time. Once these payments are made, your guarantor will send you an agreement to rehabilitate your loan. Once you receive the official notification from your guarantor, your loan is rehabilitated. After the new agreement is fulfilled, the loan is transferred to a new lender. You then make your payments to that lender. Nonetheless, you should know that you will have to pay up to 18.5% of the loan balance in collection costs. The good news, however, is that the new lender will ask the previous loan holder to remove the negative marks from your credit report. Once your loan is back on track, you cannot let it default again because you cannot rehabilitate a second time.
Loan rehabilitation allows you to regain financial aid eligibility, protect your wages and tax refunds, not have to pay your loan in full, and you can regain access to deferment and forbearance if you would need to. You can review this in addition to any of the aforementioned options to help you get your loan back on track. If you are slightly late, the other options will work. If you are severely late on your loan payments, loan rehabilitation can get you to where you need to be.