So what does it mean to default on a loan. If you default, it means that you have failed to repay your loan according to the terms of your promissory note. Federal loans officially go into default when the borrower has failed to make a payment for 270 days. Default is a huge problem with around 10% of loans going into default. The government does not take this lightly and there are real consequences that go far beyond getting bad credit.
If you think that you might have to default on your loans, you should first look into all of the available programs that are designed to provide aid for borrowers. Programs that could keep your loans in good standing. You may be able to put your loans into deferment for example and this could buy you the time that you need to get caught back up. In addition, the government has many programs that could lower your payment by making your required payment a portion of your available income.
When You Default
So, now what exactly is going to happen if you decide that you have no choice but to default on your federal student loans. Well, you do not immediately go into default.
Before you go into default, you will first become delinquent. This will happen after you become thirty days behind on your payments. After this point, your delinquency will start showing up on your credit report with 30 day, 60 day and over 90 days delinquent strikes. You will notice that your credit score will take a major dive because of this.
When you hit the 270 days delinquent notice, you will officially go into default. At this point, your account will be sent to a collection agency. You will be liable for all collection charges and they will be added to your debt.
Eventually, if the collection efforts do not work, the government and your lender can pursue much harsher options. Here are some things that can happen.
- Wage Garnishment: They will notify you first of their intent to garnish your wages and to give you one last opportunity to resolve your debt. If you fail to do so, they can, without further notice, garnish your wages.
- Future Tax Refunds Will Be Lost
Forget tax refunds until the student loans are taken care of. If you file a joint return, they will also take your spouses part.
- Cut Off From Federal Aid
If you plan to continue your education or need to get into a training program, you will no longer be able to receive financial aid.
- You Can Be Sued
Your loan holder has the right to take you to court to collect their money. If you have any assets, expect them to do so.
- Go After Co Signers
If you have a cosigner on any of your loans that you default on, they can go after them as well. Since cosigners are usually close relatives or friends, this can put some serious strains on relationships.
- You Can Get Stressed Out
Being in debt is stressful, especially if that debt is owed to the federal government and can never go away.
Getting Your Life Back
So, you defaulted on your loans. You either had no choice because you were in desperate need of money or you did not think about all of the consequences. Whatever the case, you have probably had all of the things above happen to you and you want to get out of the situation. The loans will not go away.
Before You Default
If you are delinquent and have not officially defaulted yet, you have many options available to you. You should call your lender before things get worse and try to work with them. They do not want you to default, the situation is not good for anybody. You may be able to qualify for a lowered payment or even a deferment. It doesn’t hurt to call but it does hurt to ignore the situation, because it will never go away. These loans are yours until they are paid off.
After You Default
You have several options to get your loans taken care of. Most people will choose loan rehabilitation but consolidation is also a good solution, especially if you qualify for an income-based plan.
The first option is rehabilitation. This is the process of getting your loans back in good standing by making timely monthly installment payments for a set period of time. To begin, you will need to contact your lender and tell them that you would like to rehabilitate your loan. They will come up with a plan that takes your income into account. The lender will take your discretionary annual income and multiply it by 15%. They will then divide this by 12 to come up with your payment for the rehab agreement.
Once you make 9 payments on time successfully, your loan will no longer be in default and will be considered in good standing. Once in good standing, wage garnishment will cease, you will be able to receive additional federal assistance and the notice of default will be removed from your credit. Late payments will still show but these will eventually drop off.
Consolidation may be another option available to you. Loan consolidation will allow you to pay off multiple student loans in one loan. To qualify for consolidation, you have two options. First, you can make three consecutive voluntary payments to your lender. You will need to contact your lender for this option and they will set your monthly payment. Once the payments have been made, you will be eligible for consolidation. Your second choice is to consolidate the loan under the terms of an income-driven payment plan. There are several plans available and you must choose the type of plan you want and proof of your income when applying for consolidation.
Payment In Full
This is probably a far fetched solution but your last option is to pay off your loans in full. If you came into some money recently, this will be the quickest way to get your lender and the federal government off of your back.