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Student Loans in Default Consequences and Tips to Get Out

With the rising cost of college tuition along with lowering job prospects, it isn’t surprising that more and more people have difficulty paying off their student loans. There has been a marked increase in student loans in default since 2008 and the figures of defaulted student loans have risen for more than $80,000 from last year.

Delinquency and default

Failure in making your loan payments when they are due leads into delinquency. A delinquency period starts on the first day after you miss to make your loan payment. During the first 15 days you will receive at least one collection letter or written notice from your loan lender. After your student loans have been in delinquency for nine months (270 days), your loan holder will declare your loans in default (for the largest portion of private student loans this period is three months). In case you have trouble in making payments, it is strongly advised to contact your lenders as soon as possible, as they may have some special “default aversion” programs to help you during delinquency or you can negotiate with them to postpone your payments to help you find the solution for the problem. The most important thing is to contact your loan holder as soon as you receive their notice. Avoiding doing this can lead into deeper financial troubles and some of the student loans in default consequences are the following:

  • Damaged credit record
  • Cancellation of Federal Student Financial Aid eligibility
  • Restriction of Federal benefits like Social Security retirement benefits and Social Security disability benefits, but not Supplemental Security Income
  • Garnishments of your wages (up to 15% of your income)
  • Cancellation of certain repayment benefits
  • Extra fees and interest that are added to the original loan amount
  • Possibility of going to court
  • Cutting off of Tax Return
  • Loss of professional license.

Federal Student Loans in Default

Federal student loans offered by the US Department of Education such as Stafford Loans, Perkins Loans or PLUS Loans provide up to nine months grace period after graduation which is intended to help you find job or some other source of financing to begin repaying your student loans. In addition, federal student loans offer various repayment plans that are designated to meet different needs of the borrowers as well as student loan consolidation option. However, there is a large number of Federal student loans in default. After you have defaulted on your Federal student loan, the government goes for your wages garnishment without the court order and can independently take up to 15% of your paycheck because Federal student loans are not discharged in bankruptcy proceedings (except in limited circumstances).

Federal student Loans – Getting Out of Default

There are a few things that you can do to get yourself out of default. You have the option to:

  • consolidate your loans
  • rehabilitate your loans or
  • renew your loan eligibility.

Federal Student Loans Consolidation

Student loans consolidation option allows you to replace several loans like Stafford Loans, Perkins Loans or PLUS Loans with just one and to repay all loans with this one at lower interest rates and for extended period of time. Once you consolidate your loans your loan will be out of default. In addition, you will be able to get income sensitive repayment plans, you will no longer get collection calls, you will be eligible for deferments and forbearance, and you will be eligible for new loans.

Student Loans Rehabilitation

Rehabilitation can call off negative consequences of student loans in default. This program involves several steps. First, an officer from default Collections will arrange a monthly repayment plan for you and you will have to agree with the monthly payment sum required to participate in rehabilitation program. You have to make at least nine on-time loan repayments to qualify. After completing of rehabilitation agreement, the underwriter transfers the loan to the loan servicer and your loan is considered to be out default. Furthermore, you will be able to apply for deferment and forbearance as long as these haven’t been exhausted during the period your loan was in default.

Renewing Student Loans Eligibility

You can apply for new loans even though you are in default, but you have to work up your default status before that. First thing you should to is to call your loan lender and make a repayment agreement. After that you must keep up with payments and after six consecutive monthly payments you will reestablish your eligibility and be able to receive new student loans and grants.

Note: You must apply for any of these options to happen.

Private Student Loans in Default

With private student loans you do not have the advantage of a nine months period in case you miss payments on your private student loan. You should bear into mind that if you are a private student loan borrower, your loan will usually go into default as soon as you miss the payment, although some private loan lenders offer three months period before declaring your loan defaulted. This default period will be outlined in your loan contract. Therefore, you should carefully review your private student loan contract to learn what are your rights and obligations related to the loan. For the wage garnishment in case of private student loans, the lender must get a court order and the rules governing this sort of garnishment vary from state to state.

Private Student Loans – Getting Out of Default

There are fewer options for getting out of default for private loan borrowers like Sallie Mae or Wells Fargo than for people who have default on their federal loans. One of available alternatives is forbearance, which means that the borrower only has to make interest payments for a period of time approved by the lender. Although this may provide some temporary relief, it actually increases the sum you have to pay back, since the principal remains the same and the interest continues to accrue.

Being into default does not have necessarily negatively to affect your finances, career or life. All you have to is not to panic but to take the first steps in the direction toward solution of your problem. Contact your loan servicer and ask for assistance. Loan forbearance, consolidation or rehabilitation program may help you to get out of default.

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