If you don't make your loan payments every month, you could fall into student loan default. Defaulting on student loans affects many aspects of your financial and professional life. But there are steps you can take to avoid it including changing your payment plan, talking to your loan servicer about forbearance, or refinancing private student loans (it likely doesn't make sense to refinance federal student loans amid current benefit extensions).
Before you're in need of credit repair, consider other options with your student loan servicer. Credible can help you explore options for refinancing student loans and reducing your monthly payments. Visit Credible today to compare student loan refinancing rates and see how your payment could be affected by refinancing.
What is student loan default?
Student loan default occurs when you miss too many payments. Considering the significant student loan debt many Americans currently carry, this can become a common occurrence.
Specifically, if you don't make a loan payment for 270 days on your Direct Loans or Federal Family Education Loans (FFEL loans), you'll be considered in default. With private student loans, the specific number of payments you're able to miss before entering student loan default varies by lender. It could be as few as three payments.
What are the consequences if I default on federal student loan payments?
If you default on federal student loan payments, there are serious repercussions.
Federal student loans default affects a broad array of items. You could become ineligible to receive federal loans in the future, and the full balance on your current debt will become due immediately. You won't be able to switch repayment programs or put loans into forbearance or deferment. Your credit score will be damaged; the government could seize tax refunds or federal benefit payments, and your wages could be garnished. You could also be sent to collections, and your school could withhold your academic transcripts.
It's also possible that your professional license (if you have one) could be suspended.
What are the consequences if I default on private student loan payments?
When you fall into student loan default on private student loans, there are also serious repercussions.
Your credit could be damaged by reports of default and your lender will likely send you to collections. Your entire loan balance can become due, and you could face legal action to collect that may lead to a court order to garnish wages.
How do I recover from student loan default?
When you default on federal student loans, options include:
- Student loan rehabilitation: This involves making nine payments over 10 months under an agreement with your loan servicer. Monthly payments equal 15% of annual discretionary income, which is based on the poverty level. After you've made your payments, you'll no longer be in default, and the record of default is removed from your credit report -- although the late payments remain on your record.
- Student loan consolidation: You can apply for a Direct Consolidation Loan and must either make three on-time payments or apply for an income-driven plan before officially consolidating. Once your loan is consolidated, you'll no longer be considered in default and will be eligible for all federal loan benefits again. The default remains on your record.
If you have private student loans, you'll need to ask about options with your lender. It's best to avoid this in the first place, as there's not a standard path out of default as there is with federal loans. Refinancing student loans before missing a payment could help you avoid default. If you're looking to potentially lower your private student loan payments, refinancing them could be the way to go. Visit Credible to compare student loan refinancing rates and terms and explore options.
How to avoid student loan default
Paying for college while also building your credit isn't always easy. Your options for avoiding student loan default vary depending on whether you have private loans or federal loans.
If you have federal loans, you may be able to qualify for deferment or forbearance to pause payments. Deferment can be a better option if you're eligible since you won't owe interest on deferred subsidized loans. You can also choose a different repayment plan, including an income-driven plan that caps payments at a percentage of income.
If you have private student loans, forbearance may still be an option to temporarily stop payments. But forbearance policies among private lenders generally aren't as generous as for federal loans.
Before you're stuck getting out of default for multiple defaulted loans, do some research. You could potentially avoid default if you refinance student loans. Many financial experts recommend refinancing and with good reason. It can often reduce your monthly payments considerably, making them more affordable. There is an important caveat, however: given that student loan payment and interest deferment on federal student loans runs through September 30, 2021, now is not a good time to refi federal student loans (borrowers will lose some benefits and protections like public service loan forgiveness). It is, however, a great time to refinance private student loans.
You can use an online tool like Credible to view a rate table that compares rates from multiple lenders at once to see how your loan terms could change by refinancing. You can also use Credible's online student loan refinancing calculator to see what your new monthly payments would be after refinancing.
By shopping around for the best student loan refinance rates with Credible before you default, hopefully, you can find a new loan with payments that fit your budget.