Student loan debt balances are at an all-time high, and the exorbitant monthly payments are causing financial distress for borrowers. In February of 2019, the aggregate sum amongst 44.7 million borrowers was a whopping $1.5 trillion, with a default rate of 11.4 percent, notes Forbes.
So if you’re struggling with student loan payments, you’re not alone. Or maybe you’ve already defaulted and aren’t sure what comes next. Either way, keep reading to learn more about how to move forward to find the relief you need.
Student Loan Default, Explained
Whether you miss a payment on your student loan due to oversight or the inability to pay, the account will become delinquent. At this point, you will incur a late fee after the grace period has passed. Fortunately, you still have time to get caught up before it’s reported to the credit bureaus.
But if you’re in dire financial straits and decide to ignore the loan altogether, serious consequences could follow. Or you can reach out to the lender to find a solution that’s fair to both parties. More on that shortly.
Consequences of Student Loan Default
Student loan default has serious repercussions that span beyond late payment penalties. The loan servicer will eventually communicate the delinquency to the credit bureaus, which means bad news for your score. And if you were taking advantage of a program offered by the loan servicer to alleviate the financial burden, like a deferment or forbearance, you could lose access to those privileges.
Wondering what constitutes default? It’s at the point where the student loan is 270 days past due.
When are the credit bureaus notified?
Federal loan servicers will not report your delinquent account to the credit bureaus until it reaches 90 days past due. But some private lenders aren’t as generous and will report you as soon as your account is 30 days past due.
Does the student loan default impact your credit score?
Unfortunately, this could mean a decrease of up to 100 points for your credit score once the loan is reported, particularly if your score was on the high end before the late payment was reported.
Even if you can get caught up right away, your credit score will continue to take a hit for a while as late payments linger for seven years. And unfortunately, lenders will now see you as a credit risk if you apply for loan products and credit cards and may deny your application for credit. But if you are approved, expect significantly higher interest rates.
However, the impact will dwindle over time if you bring the loan current and continue to responsibly manage other debts on your credit report.
Can late payments be removed from your credit report?
If the late payments were an isolated incident, consider reaching out to the lender to request a goodwill adjustment. There’s a detailed guide on how to move forward with this approach right over here.
Can the lender file a lawsuit to collect the amount you owe?
But what if you do nothing to address the delinquent account? The loan servicer will continue to report late payments each month, and once the account is 270 days past due, there’s a strong chance the debt will be turned over to a debt collector and listed as a collection account on your credit report. Consequently, the phone calls and letters will start, and the balance may be higher with newly added fees from the collection agency.
Failing to work out some sort of payment arrangement or offering a settlement to resolve the debt could land you in court. And depending on the outcome, you could face wage garnishments from your paycheck. In extreme cases, you may also lose your tax refund or Social Security benefits.
Can you file for bankruptcy to find relief?
In most instances, student loans are not dischargeable under bankruptcy. However, there are cases that the court may allow the debt to be discharged if you are experiencing “undue hardship”. But don’t bank of this as an option as the chances of you fitting the bill are slim to none unless you’re dealing with extenuating circumstances that will impact your well-being for years to come.
If you still decide to move forward with filing for bankruptcy, you may be able to get away with paying substantially less than you owe under Chapter 13. Why so? Well, the monthly payments will be determined by your current income, expenses, and the percentage of your income the court allows each creditor to receive.
Can student loans in default still qualify for cancellation?
Student loan cancellation is permitted if the school ceased operations during your enrollment or within 90 days of you withdrawing. And improper certification of training is another reason for student loan cancellation. You could also qualify for cancellation if you become permanently or totally disabled after you receive loan proceeds.
How to Avoid Student Loan Default
Being proactive when dealing with student loan debt will serve your finances and credit scores well for years to come. So at the first sign of financial distress, it’s important to reach out to the lender to inquire about options that are available to you. That way, you’ll have time to decide on the best course of action and avoid defaulting on the loan, being reported to the credit bureaus, and tanking your score.
Common options for borrowers who can’t afford to repay their student loans include:
- Due date extensions- give you more time to get current on your loan
- Deferment- suspends loan repayment for a set period and additional interest does not accrue
- Forbearance- suspends loan repayment for a set period but interest continues to accrue
- Alternative repayment plans- includes graduated, extended, income-based, income-contingent, income-sensitive, and pay as you earn programs that are exclusive to federal loan products. (Select private lenders also offer payment arrangements for borrowers experiencing financial hardship, but you’ll have to call to learn more and determine if you qualify).
- Consolidation- ideal if you have more than one loan because it helps streamline the repayment process
Should you refinance your student loans to avoid default?
If you’re looking to lower your monthly payment, refinancing your student loan may seem like the best option. But it depends on the type of loan you have and the rate the new lender is offering.
Why so? Well, refinancing could mean the new lender is stretching out the term of the loan, which may result in more interest paid over the new term. So you should use a refinancing calculator to determine if it’s a worthwhile maneuver.
Furthermore, if you have federal benefits and refinance with a private lender, you’ll forfeit all the perks, like income-based repayment plans and loan forgiveness, that come with managing federal student loans.
A quick tip: many only lenders that refinance student loans offer pre-qualification tools on their website to give you an idea of the rate you can qualify for with no impact to your credit score. Consider using these tools to explore your options before moving forward with a lender to gauge if refinancing is worthwhile.
Help! My Student Loans Are Already In Default!
Your first course of action when you’re already in default is to reach out to the loan servicer right away. Even if the debt is being managed by a collection agency, the loan servicer may be willing to work with you so you can get back in good standing.
When speaking with the loan servicer, respectfully plead your case and be truthful about your circumstances. Explain that you have every intention to get back on track with your payments and are eager to find a way to do so.
Federal loan servicers may be willing to place your loan back in good standing once you make nine consecutive payments on time through a rehabilitation program. This also means you will be able to take advantage of programs and benefits designed to make your payments more affordable over the loan term. (An important note: federal loan rehabilitation is extended as a one-time courtesy, so use it wisely).
Private lenders have different ways of helping you get back on track. But since situations are evaluated on a case by case basis and every lender is different, you should reach out right away to confirm if they’re willing to lend a helping hand.
The Bottom Line
Student loan default isn’t the end of the world and doesn’t mean your credit rating is doomed forever. But the sooner you take action to find a resolution, the better your chances are of minimizing or avoiding damage altogether.
To explore relief options, call your loan servicer at the number provided on your monthly statement or their website. And you have federal loans, you can reach the U.S. Department of Education at 1-800-621-3115 for assistance.