Defaulting on Student Loans

Defaulting on student loans is a serious matter that deserves a lot of consideration. Before you begin applying for student loans, it’s wise to learn more about the consequences of default, how to avoid it and, if you’re already in default, how to get out of it.

You are responsible for repaying your student loans even if you do not graduate, have trouble finding a job after graduation, or just didn’t like your school. If you do not make any payments on your federal student loans for 270-360 days and do not make special arrangements with your lender to get a deferment or forbearance, your loans will be in default.

Note that student loans are now generally not dischargeable through bankruptcy. It is fairly difficult to satisfy the requirements for an undue hardship petition. Even if you satisfy the requirements of an undue hardship discharge, often this will result in just a partial discharge of the debt.

Two options available for postponing repayment of your student loans are deferments and forbearances. If you are thinking about defaulting on your student loans, ask the lender whether you are eligible for a deferment or forbearance before you default.

Consequences of Default    

If you default on your student loan:

  • Your loans may be turned over to a collection agency.
  • You’ll be liable for the costs associated with collecting your loan, including court costs and attorney fees.
  • You can be sued for the entire amount of your loan.
  • Your wages may be garnished.
  • Your federal and state income tax refunds may be intercepted.
  • The federal government may withhold part of your Social Security benefit payments.
  • Your defaulted loans will appear on your credit history for up to 7 years after the default claim is paid, making it difficult for you to obtain an auto loan, mortgage, or even credit cards.
  • You won’t receive any more federal financial aid until you repay the loan in full or make arrangements to repay what you already owe and make at least six consecutive, on-time, monthly payments. You will also be ineligible for assistance under most federal benefit programs.
  • You’ll be ineligible for deferments.
  • Subsidized interest benefits will be denied.
  • You may not be able to renew a professional license you hold.
  • You may be prohibited from enlisting in the Armed Forces.

And of course, you will still owe the full amount of your loan.

Preventing Default

Borrow as little as possible. Default rates increase with over borrowing. If your total debt will be more than twice your expected starting salary, you are borrowing too much and should consider attending a less expensive college.

Make sure you understand your options and responsibilities before taking out a loan.

Prepare a checklist of all your loans, including the name and phone number of the lender, the type of loan, the amount of the loan, the interest rate, and especially any due dates or deadlines.

Make your payments on time.

Notify your lender or servicer promptly of any changes that may affect the repayment of your loan, such as change of address, graduation or termination of studies, leaves of absence and transfers to another school.

If you encounter temporary financial difficulties, consider applying for a deferment or forbearance on your loans. Ask your lender about these options while you are still making payments, before you default on your loan.

If you are having trouble making payments due to a more permanent income deficit, your lender may be able to suggest alternate repayment options, such as extended repayment, graduated repayment, income sensitive repayment, income contingent repayment and income-based repayment.

Consider using a consolidation loan to combine all of your educational loans into one big loan.

If you have both federal and private education loans and can afford to make the required payments on only one loan, try to avoid defaulting on the federal loans. The federal loans have more flexible repayment options and harsher penalties for default.