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What is student loan default and how to avoid it?

Defaulting on a student loan is not an option. If you default, the consequences will be severe and long-term. You may lose your job or even your home in some cases. Fortunately, some steps can help you avoid defaulting on a student loan.

What is a student loan?

A student loan, also known as an education loan or educational debt, is defined as funds borrowed by students at various institutions to cover expenses related to higher education, such as tuition fees and course materials. The amount of money that can be borrowed may differ based on the type of institution attended.

How to consolidate your loan?

This process can simplify the repayment process of a borrower who has multiple debts with different creditors. It also saves time by streamlining all these payments into one monthly payment, which may be easier on your budget.

When you get a new job, it’s essential to update your contact information with the loan holder/servicer.

If there is an error in payment allocation or if no payments were applied towards your student loans for several months, these problems can and should be fixed as soon as possible so that late fees (which are often accrued ) can be avoided.

Understanding Student loan default

A student loan borrower that has been delinquent for 270 days or more is in default. It means that the borrower can no longer make federal student loan payments and will add further late fees to the balance of their debt every month.

Defaulting on your student loans, on the other hand, might result in detrimental consequences like a poor credit score. 

Defaulting on your student debts can lead to losing your professional license in certain states, leaving you unable to work.

The sort of loans you have impacts when you enter default and what repercussions you’ll suffer.

Federal Student Defaulted loan:

You are considered in default if you fail to make a payment on your federal loan when it is due. In addition, you may go into student loan default if you continue to miss payments. When it comes to federal loans, the point at which you’re considered in default is determined by your loan program:

Direct loan and Federal Family Education Loan (FFEL) programs. You will go into default on these programs 30 days after you fail to make a payment.

Perkins loans: You are considered in default if you miss two consecutive monthly payments. In addition, the university or college that disbursed your loan must inform both the servicing company and all endorsers who cosigned for your loan within 15 business days of when it becomes aware that you have stopped making scheduled repayments.

Federal consolidation loans (Direct Loan Program):

Suppose you consolidated through any federal student loan program, such as Direct Loans. In that case, there may be several different consequences of going into default depending upon which repayment plan was initially selected.

How to avoid defaulting on a student loan?

If you are trying to figure out how to avoid student loans, you can take some steps that may help prevent your loans from going into default status. These include:

  • Enrolling in an Income-Based Repayment plan (IBR)
  • Making reduced payment plans with your lender

If none of these options work for you, consider deferring or forbearing on your federal loans while you try to figure something else out.

What are the consequences of defaulting on a student loan?

If you’re trying to avoid your loans from going into default status, then keep in mind that there are also many consequences for doing so! These include:

  • Having a poor credit score or even ruined credit history
  • Being sued by your loan holder
  • Being subject to a wage garnishment
  • Loss of federal loan benefits
  • Loss of federal aid eligibility

Notably, once you have defaulted on your student loans and go into collections or rehab status, it won’t be very easy for you to get them out of that situation. 

Even if the government takes over repayment because there are no private lenders who want to take over your debt collection, it may not make any difference since the borrower is already in arrears on their debt.

Therefore, unfortunately, this type of action could lead you closer to having an even more enormous financial burden.

What should you do if you have defaulted loan?

If you find yourself with unmet education costs due to circumstances beyond your control (e.g., unemployment), then the deferment or forbearance option may be a good solution. 

However, if you still have issues meeting repayment after exhausting these options, consider IBR or income-driven repayment loan forgiveness programs.

Defaulting on a student loan is not an option, as severe consequences come with it. The best way to avoid defaulting on your loans is by enrolling in an Income-Based Repayment plan and making reduced payment plans with your lender if necessary.

There may also be other steps you can take that could help prevent your loans from going into default status, such as deferring or forbearing while trying to figure something else out.

Deferment and forbearance programs may work temporarily but will eventually lead the borrower toward defaulting on their education debt. Therefore, it is best to enroll in an Income-Based Repayment plan to make paying back your loans more accessible for you, thus avoiding default status, which comes with many consequences.

What are the common reasons for defaulted student loans?

Reasons for defaulted student loans:

  • Inability to make payments on time due to financial hardship or other circumstances beyond your control.
  • Not receiving a repayment plan under federal guidelines
  • Defaulting on another type of government-backed debt such as mortgages, veteran’s loans, etc.
  • Employer withholding earnings (wage garnishment) without prior notice by the creditor (student loan borrower).

These reasons can happen if you have an outstanding balance and are delinquent on making monthly repayments. In this case, the employer withholds part of your wages until the entire amount is paid back in full.

Note that these steps must be done through wage attachment proceedings which involve filing legal documents against you should they choose not to apply these actions. If any of these actions are taken against you, it will garnish your wages without prior notice.

The creditor (student loan holder) sues for not repaying an outstanding balance and delinquent payments on time as stipulated in your original payment agreement.

When creditors take legal action against borrowers who default on student loans, it can lead to consequences like wage or even property attachment. Managing debt responsibly from the get-go makes a massive difference down the road when unforeseen circumstances arise, which may prevent you from making timely repayments every month.

Understanding Delinquency and Default

While some borrowers only experience one or the other, others may find themselves experiencing both delinquency and default on their student loans. In this case, you can look at delinquent status as a temporary setback while in deferment/forbearance since these plans can be renewed after your financial situation improves again.

Arrears (default), however, will last indefinitely until loan agreements are met unless there’s an agreement with creditors allowing for reduced monthly installments that fall within borrower eligibility guidelines.

Continuing up the income-driven repayment plan road could help maintain arrears status, preventing wage garnishment from happening altogether.

Credit bureaus will be notified of your default status.

Your credit score will likely drop, which can also affect future loan or debt applications you make (e.g., applying for a car, house, etc.).

Suppose any of these actions have been taken against you, you should contact your creditor immediately and develop a repayment plan that works for you.

When should I call my lender?

Call your loan servicer if:

  • It would be best if you had a deferment or forbearance to avoid taking out an IBR plan.
  • You need documentation for eligibility in the Income-Based Repayment program.
  • Your loan is already delinquent, and you are unable to make payments on time as scheduled.

Suppose your student loans have gone into default status. In that case, all communication with creditors will go through your designated servicer, who can help negotiate repayment terms based on borrower eligibility guidelines such as income caps that may allow monthly installments of $0 if necessary.

There’s no use fighting it when options are available for those experiencing financial hardship so take advantage of them while they’re still around before things get even worse.

Think long and hard before deciding against enrolling in these programs because once this choice is made, it cannot be undone! However, if you’re already facing a default status and your wages are being garnished without prior notice from the creditor (student loan holder), there may still be time to enter into an IBR plan, provided that eligibility requirements are met.

What is the difference between federal loans and private student loans?

The main difference between federal and private student loans is that students who cannot pay back their debt have a greater chance of obtaining relief from default status through IBR plans or filing for bankruptcy.

Federal vs. Private Student Loans

On the one hand, borrowers with federal student loans can apply for an Income-Based Repayment plan, a government program that helps lower monthly student loan repayments based on borrower income and family size.

Income-Contingent Repayment plans are another option for federal borrowers with Direct Loans to take advantage of if they’re experiencing financial hardship.

On the other hand, students who hold private loans have trim options to pursue when it comes down to avoiding defaults and delinquency.

The best option for private student loan holders is enrolling in an IBR plan if they’re eligible or filing for bankruptcy.

In addition, even though the Income-Contingent Repayment program was designed primarily with federal borrowers. Keep in mind; private student loan holders can also benefit from this plan if they’re eligible.

This means that monthly installments will be based on a percentage of income or family size, which is why it’s essential to contact the creditor immediately and try to negotiate an IBR payment agreement to avoid further delinquency.

Suppose you have fallen behind on your student loan repayments and notice that wage garnishment has already begun. In that case, you can potentially avoid further problems by applying for an Income-Based Repayment plan to lower monthly installments based on income.

What Are My Options if I Fall Behind on Student Loan Payments?

Student Loan Rehabilitation

The first option you can pursue is enrolling in a student loan rehabilitation program, allowing the borrower to re-enter into good standing status after making up for past delinquencies.

For example, eligible borrowers need to successfully make nine on-time monthly payments within 20 days of each due date before their loans may be considered for rehabilitation.

Once the nine payments have been made successfully, borrowers can remove the derogatory remark from their credit reports and return to a good standing status, allowing them to make future loan repayments without facing delinquency or defaulting again shortly.

Student Loan Consolidation

Another option you may pursue is student loan consolidation which combines all of your eligible loans into one new loan with a single monthly installment.

Borrowers who enroll in this program will also be able to take advantage of repayment benefits such as extended time frames and lower interest rates depending on the type of debt consolidated. Thus, borrowers will be able to save money on interest charges in the long run.

Contact Your Lender for Private Loans

If you have already defaulted on your loans, the best step for private loan holders is to contact their lender immediately to discuss repayment options.

Keep in mind that there are many benefits and payment plans available to help borrowers avoid delinquency or even defaulting again.

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