Getting Out of Student Loan Default
Do you have defaulted student loans? If you do, I can actually connect with your feelings. The truth is that, you are not alone. The rate at which borrowers are defaulting on student loans is very alarming. This is not to say that I am encouraging people to default in their student loans. Instead, I just want to let them know that having defaulted student loans is not the end of the world. Instead of allowing the debt burden to weigh you down, I think it is better that you think about possible solution. Is there any way out of the debt? Actually, there are steps one can take in order to get your student loans out of default. Before we start talking about these, let’s look at the Student Loans statistics as at the 3rd quarter of the year 2017.
Student Loans Statistics
Student loans borrowers: Over 45 million borrowers
Outstanding Student Loans Balance: Above $1.48 trillion
Number of defaulted borrowers 6.5 million borrowers
Defaulted Student Loans $113.5
Thanks for statistics. I believe that some people never knew that more than 45 million Americans owe student loans to the tune of $1.48 trillion in total. Those figures are not actually the main issue as far as I am concerned. The one that is most worrisome is the number of people that their student loans are already in default. From the statistics above, you can see that there are 6.5 million borrowers with defaulted student loans of $113.5 million. That will tell you how many people live under the debt burden on a daily basis. This situation does not only affect the individuals’ standard of living, it impacts the American economy in general in one way or the other. For people that don’t understand the meaning of default, I will quickly explain the term within the context of this article.
Meaning of default
Literally, one may say that default occurs when a borrower is unable to pay his loan when due. That is, when a person fails to meet his legal obligation for the repayment of loan. But in the context of federal student loan, it may be a bit different. When any person borrows federal student loans, he is expected to be making a monthly payment based on the terms of the loan until the entire loan amount, both principal and interest, is liquidated. But if a person fails to make a payment at the end of the month, the loan will not be classified as defaulted student loan. Instead, it will be said that the person is delinquent in payment. But if you are unable to make payment for nine months, then your federal student loans will enter default status. Before then, you must have been receiving different mails requesting you the need to make payment on your loan. The Department of Education or your loan servicer will usually contact you to notify you about the position of your student loan. The consequences of student loan default are not favourable to borrowers in any way.
Consequences of Student Loan Default
- The student loans balance becomes due immediately. If you allow your federal student loans to go into default, the entire student loan balance including principal and interest becomes due immediately. If you were unable to make monthly payments, I am afraid you may not be able to afford to pay the entire loan balance immediately.
- Loss of some benefits: Federal student loans offer the benefits of deferment and forbearance. That is, a situation whereby you can temporarily suspend the payment of your student loan. It may be due to the fact that you are returning to school or as a result of loss of job which may bring financial hardship thereby making it impossible for you to pay your student debts. You will also lose eligibility for loan forgiveness.
- Garnishment: If you have defaulted student loans, you can expect wage garnishment to be imposed on you. This mean that certain amount, usually fifteen per cent of your disposable pay checks, will be withheld every month towards the repayment of the loan. In case of a court order, the garnishment can be up to 25 per cent of your pay check. This will continue until the total outstanding balance of the defaulted student loans is paid off. If your loan is a private student loan, the lender may need to obtain court order to do this. But for federal student loans, it is part of the loan terms which you agreed to at the point of applying for the loan. However, there are certain tricks you can still apply to postpone or stop the garnishment. Ordinarily, garnishment requires at least 30 days’ notice. Within these 30 days, you can quickly respond to the letter that you will like the Department of Education to give you a fair hearing. You may be able to stop the garnishment if you can successfully prove with evidence that the process will create financial hardship for you and family. Also, if you lost your job and you have not spent up to twelve months in your current employment, you can use that as a good reason why your wage should not be garnished.
- Treasury offset: What this means is that your tax refund or other federal payments such as social security payments and social security disability benefits will be withheld. However, if you are totally disabled without any hope of medical improvement, your social security disability benefits may be released to you if the Social Security Administration can attest to your disability. But if your social security disability benefit is converted to retirement benefit, the treasury offset may continue.
- Loss of driver’s license and other licences issued by the state: This applies to people with defaulted student loans under Federal Family Education Loan (FFEL) Program that are being held by a guaranty agency.
- Bad credit: Every time you make late payment on your loans or you allow your loans to go into default, report is sent to credit bureaus. The information will appear on your credit report. This has damaging effects on your credit. It will lower your credit rating. In fact, it will make it difficult for you to get a new loan.
- Transcript denial: You may be denied your academic transcript if you apply to is and there is nothing you may be able to do about it. Transcript actually belong to the school. They can choose to release it or not. You may not know know the importance of a transcript until you actually need it for certain reasons.
- Inability to access additional student loans: One of the vital eligibility requirements for federal student loans is that you must not have existing defaulted student loans. Until you get your loan out of default. You will not be considered for financial aid.
How to avoid student loan default
You now understand why you should not allow your student loans to enter default status. Instead of defaulting in the payment of your student loans, there are actually certain steps you can take to prevent the situation. People say that prevention is better than cure. Below are some practical ways of preventing federal student loans from going into default.
- Deferment or Forbearance: With deferment and forbearance, borrowers can temporarily suspend or reduce the amount being paid towards the repayment of their student loans. While the two programs will help you postpone the payment of your federal student loans, you need to understand that interest will accrue all through this period. With subsidized federal student loans, the government will help you pay the interest that accrue during the deferment period while you will be responsible for interest payment in case of unsubsidized federal student loans. During forbearance, individuals are responsible for the payment of interest on all kinds of the federal student loans.
- Income based repayment: Federal student loans have different income based repayment plans that can help you tailor your repayment amount to what you can afford in order to avoid your loan going into default. One of the reasons there are many student loan default is that, the amount set as monthly repayment is quite high compare to what the borrowers earn. This is common with private student loans. If your own debt is private, you can actually communicate with your lender so that he can understand your situation. You can reach an agreement to lower your monthly repayment amount that will be convenient for you to pay.
Cost of student loan default
I still want to repeat it here that, it is better not to allow your student loans to go into default. Besides the psychology effects that the defaulted student loans may have on the individuals, the cost implication is also high. You should understand that what you will end up paying can be very enormous. Below are some of the costs involved:
- Accumulated interest: All through the period that your student loan is in default status, the interest will continue to accrue. I want to believe that you know the effect of compound interest. Each month, the loan will accrue interest and any unpaid interest will accrue another interest. That is why such loans can grow so big that it becomes unbearable to the borrowers.
- Late payment fee: Right form the first month you failed to make your repayment, the late fee might apply. In private student loans, it may not just be a late fee, the applicable apr to the loan may go up.
- Collection fee: Any cost incurred by your lender or collection agency will be passed to you. That means you will be responsible for the payment of such costs.
How to Get Your Federal Student Loan Out of Default
If your student loan is already in default, the question you may want to ask is, ”How can I get the loan out of default?” There is no problem without a solution. It is just for us to know what we need to do. Below are few options available for borrowers that want to get their federal student loans out of default.
- Make full payment: The chance that this option will work for some people will be very slim. Why do I mention it here then? I know that if you had the money to pay off the loan, the loan would not have entered default in the first place. That is understood. However, it is possible that after your student loans have entered default that you received an inheritance or gifts which you can use to pay off the loan. If you are fortunate to belong to this class, it can be a good opportunity for you to quickly pay off all the defaulted student loans so that you can breathe fresh air of freedom from debts.
- Student Loan Rehabilitation: This process is quite long but it is worth doing. You begin the process by contacting your lender or the collection agency that handled your defaulted student loans. You will agree to be paying certain amount towards the repayment of the defaulted student loans. The amount has to be reasonable but should be what you will be able to pay so that you will not end up in default the second time. Once the amount has been agreed with your lender or collection agency, you will need to make payments for ten consecutive months before the get the loan out of default. You should ensure that you don’t make late payment all through the ten months. If you make late payment, you will need to restart counting the number of months you put into the rehabilitation program from one again. It has to be un-interrupted ten months. Please note that if the defaulted student loan is already under wage garnishment, the amount being withheld from your pay check will not be counted toward the rehabilitation payment amount. Only the amount you voluntarily pay will be counted as payment for the rehabilitation program. Also, you should note that the rehabilitation program does not automatically stop the wage garnishment. The wage garnishment can be stopped after you have successfully made payment for five consecutive months towards the rehabilitation of the student loan. If you can successfully rehabilitate your federal student loans, you will be eligible for forbearance, deferment and forgiveness programs. You will be able to choose your repayment plan. Furthermore, you will be eligible for new student loans. Above all, the default status will be removed from your credit report. Nevertheless, the record of late payments earlier reported to the credit bureaus before the loan went into default will still remain in your credit report.
The three main disadvantages of rehabilitation are; it requires making payments for complete ten months. If the defaulted student loan is already under wage garnishment, rehabilitation program will lead to double payments. This can lead to late payments or another default. You can only rehabilitate your defaulted student loans once. If you default the second time, you will not be able to enrol in another rehabilitation program. Rehabilitation can only be done once. If you default the second time, the option left for you is consolidation.
- Student Loan Consolidation: You can consolidate your defaulted student loan so that you can pay it off with the new consolidation loan. Before you can consolidate defaulted student loans, you must agree to repay your new consolidation loan under income-driven repayment plan. Alternatively, you can make full monthly payment on the defaulted student loan for three consecutive months. In addition, you need to ensure that you make all three payments on time. Unlike under rehabilitation program, you will not be able to consolidate defaulted student loan that is currently under wage garnishment except the garnishment order is lifted first.If you consolidate your defaulted student loans you will be eligible to some benefits such as loan forbearance, deferment and forgiveness. You will also be eligible to obtain new federal student loan. But the default status will still remain in your credit report.
- Student Loan cancellation: This option is not known to some people. You can actually apply for debt cancellation for certain reasons. The law allows student loan borrowers to apply for loan cancellation if they attended a school that closed while they were enrolled, or if they withdrew 120 days before the school’s closure which made them unable to complete the educational program. You can also apply for the cancellation of the defaulted student loan on the ground of false certification or you are due for certain unpaid refund as a result of you leaving the school early. If you only attended the school for less than 60 per cent of the loan repayment period, the school should have refunded part of your student loan to your servicer.