Are you struggling with student loan debt? Student loan default can be a serious problem with long-lasting negative effects on a borrower’s financial, social, and personal life.
Default means that a borrower has failed to make their loan payments according to the agreed upon terms. It can lead to wage garnishment, tax refund garnishment, damage to credit scores, difficulty obtaining additional financial aid, legal action, and difficulty finding a job or rent. It can also make it difficult to obtain professional licenses, travel, and even affect the borrower’s ability to obtain loan forgiveness.
Here, we help you understand the process and potential consequences of defaulting on a student loan so you can make informed decisions and take steps to avoid it.
If you have already defaulted, we also provide guidance on how to take steps to rehabilitate your loans as soon as possible.
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Consequences of Defaulting on Student Loans
Defaulting on student loans can have serious financial, social, and personal consequences that can last for many years. Some of these consequences include:
- Wage Garnishment
Defaulting student loan borrowers can have a portion of their wages garnished by the government. This means that a percentage of their earnings is withheld by their employer and sent directly to the loan servicer to pay off the defaulted loan. This can make it difficult for borrowers to make ends meet and can last for several years.
- Seizure of Tax Refunds
The government can also garnish a borrower’s tax refund if they have defaulted on their student loans. This means that instead of receiving their tax refund, the money will be applied to the outstanding loan balance. This can be a significant financial setback, especially for those who were counting on that money to pay bills or make a large purchase.
- Damage to Credit Score
Defaulting on a student loan can have a major negative impact on a borrower’s credit score. This can make it difficult for them to qualify for credit cards, car loans, mortgages, or other forms of credit in the future. It can also lead to higher interest rates and fees, making borrowing more expensive.
- Difficulty Obtaining Additional Financial Aid
Defaulting on a student loan can also make it difficult for borrowers to obtain additional financial aid in the future, such as grants or scholarships. This can limit their ability to continue their education or training.
- Difficulty Obtaining Other Types of Credit
It difficult to obtain other types of credit, such as a car loan or mortgage. This can limit a borrower’s ability to make large purchases or investments.
- Legal Action
In some cases, the government may take legal action against borrowers who default on their student loans. This can include lawsuits and wage garnishments.
- Difficulty Finding a Job
Some employers conduct background checks on job candidates and may not hire someone with a defaulted student loan.
- Difficulty Renting
Landlords may also check a tenant’s credit history, so defaulting on a student loan could make it difficult to rent an apartment or home.
- Loss of Eligibility for Loan Forgiveness
Borrowers who have defaulted on their student loans may lose eligibility for loan forgiveness programs that they may have otherwise qualified for. This can include programs like Public Service Loan Forgiveness or Teacher Loan Forgiveness.
- Increased Interest Rates
Defaulted student loans may accrue interest at a higher rate than non-defaulted loans. This can make it more difficult and more expensive to pay off the loan over time.
- Difficulty Travelling
Defaulted student loans can also affect a borrower’s ability to travel. Some countries may bar entry to people with outstanding debt, and some airlines may not allow people with unpaid debt to board flights.
- Difficulty Obtaining Professional Licenses
Some states and professional organizations require that applicants for certain licenses, such as a real estate or securities license, be in good standing on all of their debts. Defaulting on a student loan can make it difficult to obtain these licenses.
How long can a student loan remain in default?
The length of time a student loan can remain in default varies depending on the type of loan and the actions taken by the borrower. Here are some things to consider:
- Federal student loans – Federal student loans have a standard default period of 360 days, after which they are considered to be in default. However, the default status can be removed from a loan if the borrower takes steps to rehabilitate or consolidate the loan. Once a loan is rehabilitated, the borrower may regain eligibility for certain benefits such as deferment and forbearance.
- Private student loans – The default period for private student loans is typically shorter than for federal loans, often around 120 days. However, the terms of private student loans can vary widely, so it’s important to check the loan agreement for specific information.
- Collection costs – Once a loan is in default, the loan servicer can add additional collection costs to the loan balance, which can increase the amount that the borrower owes.
- Reporting to credit bureaus – The loan servicer will report the default to the credit bureaus which can have a negative impact on the borrower’s credit score for up to 7 years.
- Wage garnishment and Tax Refund Seizure – Defaulted student loan borrowers may have a portion of their wages garnished by the government and may have their tax refund seized. These actions can last for several years and will continue until the loan is rehabilitated or the borrower enters into a repayment plan.
Tips for Avoiding Student Loan Default
Avoiding student loan default requires planning, discipline, and a willingness to seek help when needed. Here are some tips and strategies that can help borrowers avoid default:
Understand your loans – Make sure you understand the terms of your loans, including the interest rate, repayment period, and any fees or penalties. Keep track of your servicer’s contact information and make sure you know when payments are due.
Communicate with your loan servicer – Stay in touch with your loan servicer and let them know if you’re having trouble making payments. They may be able to offer you alternative repayment options that can help you stay current on your loans.
Create a budget – Create a budget that takes into account your income, expenses, and loan payments. Be sure to include money for emergencies and unexpected expenses.
Prioritize payments – If you’re having trouble making payments on all your loans, prioritize those with the highest interest rates or the worst consequences for defaulting.
Consider consolidation: If you have multiple federal student loans, consolidation can simplify loan repayment by combining several loans into one. Consolidation can also lower your monthly payment and extend your repayment period.
Explore income-driven repayment plans: Income-driven repayment plans base your monthly loan payment on your income and family size. These plans can lower your monthly payment and may even forgive your remaining loan balance after 20-25 years of payments.
Get help: If you’re having trouble making your student loan payments, don’t be afraid to seek help. There are organizations that can help you with budgeting, credit counseling, and loan repayment.
It’s worth noting that avoiding default on student loans requires a proactive approach, taking the steps early on to understand the loans, create a budget, and explore different repayment options before falling behind on payments. By taking these steps, borrowers can avoid default and the serious financial, social, and personal consequences that come with it.
What to do if you have defaulted on your student loans
How can I rehabilitate and consolidate my student loan debt?
If you have defaulted on a student loan, then the two options available to you are rehabilitation and consolidation. Let us discuss each a bit further:
Rehabilitation is a process that allows borrowers to bring a defaulted loan back into current status. To rehabilitate a defaulted loan, the borrower must make nine voluntary, on-time, full monthly payments within 20 days of the due date over a period of 10 consecutive months. Once the loan is rehabilitated, the default status is removed from the borrower’s credit report and the borrower regains eligibility for certain benefits, such as deferment and forbearance.
Consolidation is the process of combining more than one federal student loan into a single new loan. Consolidation can simplify loan repayment by combining multiple loans into one, lowering the monthly payment, and extending the repayment period. Consolidation can also help borrowers who have defaulted on their student loans by allowing them to return to repayment status and regain eligibility for benefits such as income-driven repayment plans and loan forgiveness.
Benefits of rehabilitating and consolidating defaulted loans:
The benefits of rehabilitation and consolidating defaulted loans include:
- Improving credit score: Defaulted loans can have a negative impact on a borrower’s credit score, rehabilitating or consolidating the loan can remove the default status from the credit report and improve the credit score.
- Lowering monthly payments: Rehabilitation and consolidation can lower the monthly payments and extend the repayment term, making it more manageable for the borrower to repay the loan.
- Regaining eligibility for benefits: Rehabilitation and consolidation allows the borrower to regain eligibility for benefits such as deferment, forbearance, and loan forgiveness programs.
- Simplifying loan repayment: Consolidating multiple loans into one can simplify loan repayment by having only one loan to keep track of, one due date and one loan servicer.
It’s worth noting that rehabilitating and consolidating defaulted loans can help borrowers get back on track with their loan repayment and avoid long-term consequences of default, but it’s important to note that it may not be available for all types of loans or for all borrowers. It’s important to check the loan agreement, and if in doubt, to contact the loan servicer for more information.
The Relationship Between Default and Bankruptcy
The relationship between defaulting on a student loan and filing for bankruptcy is that bankruptcy can provide some relief for borrowers struggling with defaulted student loan debt, but it is not a guaranteed solution.
When a borrower defaults on a student loan, they may consider filing for bankruptcy as a way to discharge or eliminate the debt. It is important to note, however, that student loan debt is generally not dischargeable in bankruptcy except in very specific and rare circumstances, such as when repayment of the loan would impose an undue hardship on the borrower and his or her dependents.
To seek a discharge of student loan debt in bankruptcy, the borrower must file an adversary proceeding, which is a separate legal action within the bankruptcy case. This process can be complex, time-consuming and expensive, and the outcome is uncertain. Even if the court grants a discharge, the discharge of student loans may have a negative impact on the borrower’s credit score and may make it more difficult for the borrower to obtain other forms of credit in the future.
In summary, defaulting on a student loan can have serious financial, social, and personal consequences that can last for many years. It’s important for borrowers to understand the terms of their loans and take steps to avoid default. This includes creating a budget, communicating with your loan servicer, and exploring alternative repayment options such as consolidation and income-driven repayment plans.
For borrowers who have already defaulted on their student loans, rehabilitation and consolidation may be options to get back on track and avoid the long-term consequences of default. However, it’s important to note that these options may not be available for all types of loans or for all borrowers.
Borrowers who are struggling with or at risk of defaulting on their student loans can seek assistance from organizations such as the Department of Education, non-profit credit counselling agencies, or legal aid organizations (someone like StudentAid). These organizations can provide information, advice, and assistance with budgeting, credit counselling, and loan repayment.
It’s important to keep in mind that defaulting on student loans can have serious financial, social, and personal consequences that can last for many years, and that it’s important to take steps to avoid default and, if you’re already in default, to take steps to rehabilitate your loans as soon as possible.