Paying back student loans can be difficult, especially if you are a recent grad who has failed to find a job, or if you have been laid off recently. If you are having trouble making your student loan payments, you need to make certain to take all precautions and steps to avoid student loan default. Defaulting on your student loans can have serious long-term consequences that can affect not just your finances but also your personal and professional life. Fortunately, there are steps you can take to avoid this outcome and regain control of your loan repayment process.
If you are having difficulties making your monthly student loan payments, you should contact your student loan lender immediately and make them aware of your situation. Your student loan lender will be able to advise you on any and all options you may have to postpone your student loan payments or apply for a different student loan repayment plan depending on what type of student loans you have. Below are five key reasons why you do not want to let your student loans slip into default:
When you default on a student loan, the entire remaining balance of your loan becomes due immediately. This means that if you have $20,000 left to pay, you would suddenly owe the entire $20,000 instead of your regular monthly payments. This can be financially devastating, as the immediate burden of such a large sum is often beyond the means of recent graduates or anyone facing financial difficulties. Defaulting can force you into a position where paying back your loan becomes nearly impossible, worsening your financial situation.
In addition to the full loan balance becoming due, collection costs could also be added to your loan. These collection fees could be as high as 19.5% of the loan balance. This means that if you owe $20,000 on your student loans, you could face an additional $3,900 in collection fees on top of the loan balance itself, significantly increasing your total debt. These fees are tacked on because of the expenses involved in trying to recover the loan from you. As a result, your debt will balloon even further, making it harder for you to pay it off.
Your credit score plays a vital role in your financial future. When you default on your student loans, the default will appear on your credit report for up to seven years. This can severely damage your credit score, which will make it difficult for you to take out other forms of credit, such as a car loan, mortgage, or credit card. Having a poor credit score can also affect your ability to secure rental housing, as many landlords check credit reports before renting to tenants. Even if you are able to secure a loan or rental agreement, you will likely face much higher interest rates or a larger security deposit due to the damage done by your defaulted loans.
One of the most serious consequences of student loan default is wage garnishment. If your loans are in default, your employer could be served with a legal garnishment notice. This means that a portion of your wages, typically 15%, would be withheld directly from your paycheck and sent to the loan servicer to repay your defaulted loan. This can create significant financial strain, especially if you are already struggling with other expenses. Wage garnishment can last until your student loan debt is repaid or until you take action to have the garnishment removed.
If you default on your student loans, the government may also intercept your income tax refunds and apply them to your loan balance. This is known as a tax offset. While this might sound like a quick way to pay off your loans, it can be devastating if you were counting on your tax refund to cover other expenses. Tax offsets could also occur for future refunds, further prolonging your financial difficulties.
Despite these severe consequences, it’s important to know that there are many ways you can prevent your student loans from going into default. The key is to act quickly and seek help as soon as you realize you may have trouble making your payments. Below are some steps you can take:
The first step you should take if you are struggling to make payments is to contact your loan servicer. Don’t wait for your loan to fall into default—reach out to your servicer as soon as you realize there might be a problem. Your servicer can help you explore various repayment options such as Income-Driven Repayment Plans, which can adjust your monthly payments based on your income and family size.
If you are facing a temporary financial hardship, you might qualify for deferment or forbearance. These options allow you to postpone or reduce your payments for a period of time. While in deferment or forbearance, interest may continue to accrue on your loan (depending on the type of loan you have), but your payments will be reduced or postponed. This can provide short-term relief if you’re struggling to find a job or have experienced a layoff. However, deferment and forbearance should be used cautiously, as the interest may add up over time and increase your overall loan balance.
If you are not already on an Income-Driven Repayment (IDR) Plan, you should consider switching to one. IDR plans base your monthly payment on your income, and they can lower your payments significantly if you’re earning a low income. There are different IDR plans available, including the Income-Based Repayment (IBR) Plan, Pay As You Earn (PAYE) Plan, and Income-Contingent Repayment (ICR) Plan. Each plan has different eligibility requirements and terms, but they all aim to make your payments more manageable based on your financial situation.
If you have multiple federal student loans, consolidating them into a Direct Consolidation Loan can simplify your payments. Consolidation allows you to combine all your loans into one loan with a single monthly payment. This can make it easier to manage your debt and avoid missed payments. However, consolidation may not always be the best option if it extends your repayment term and results in higher total interest payments. Be sure to weigh the pros and cons before choosing this route.
If you have private student loans, refinancing could be an option to lower your interest rates and monthly payments. Refinancing involves taking out a new loan to pay off your existing loans, ideally at a lower interest rate. However, refinancing federal loans into private loans may cause you to lose access to certain federal protections such as income-driven repayment plans and deferment options. Be sure to carefully evaluate the pros and cons before deciding to refinance.
If you’re overwhelmed by your student loan situation, it might be helpful to consult with a financial advisor or student loan counselor. These professionals can help you understand your options, negotiate with your loan servicer, and create a realistic repayment plan that works for your financial situation. Some nonprofit organizations even offer free or low-cost student loan counseling services. Don’t hesitate to seek help—student loan debt can be complicated, and professional guidance can make a big difference.
If you’ve already missed payments and your loans are approaching default, it’s important to act quickly to avoid the worst consequences. The sooner you take steps to address your loans, the better. In many cases, you may still be able to rehabilitate your loan, which will remove the default status from your credit report and allow you to get back on track with a more manageable repayment plan. Loan rehabilitation typically involves making a series of on-time payments to your loan servicer, and once you’ve completed the process, the default status will be removed from your credit report.
While student loan debt can be overwhelming, defaulting on your loans should always be avoided. The consequences of default can last for years and cause lasting damage to your financial well-being. Stay proactive and contact your loan servicer as soon as you encounter financial difficulties.
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