We’ve written at some length about the ever increasing student loan debt facing those going to college today. If you’re a college student without a lot of family financial support, you’re likely going to incur a bit of debt. Debt that, despite your understandable reluctance, you’ll have to pay back. In a diminishing job market, this often seems overwhelming.
We’ve all known that guy (or gal) who found themselves in such a situation. Our guy, let’s call him Jake, graduated from college, but didn’t get that high paying job he’d been promised. He was picky about pay at first, and no one would hire him. Maybe he had a bad resume or perhaps he was simply in a terrible market–still, he remained unemployed throughout his loan deferment period.
Then, the threatening letters started to come. They were scary, so Jake ignored them and nothing seemed to happen. He could have filled out the forms required to extend his deferment, but he didn’t. Eventually, ignoring the problem turned into a problem–the government took action to collect the money–straight from his tax return.
It’s important to understand what exactly loan default is, lest you do it. Simply, it is when a person fails to make payments per the schedule established. Usually outlined in a promissory note, the terms are legally binding if you’ve signed.
The first day you fail to make your scheduled payment, you become delinquent. This will continue until every payment is made and your loan becomes current. This will impact your credit score, which will impact things like loan rates for house and cars, the availability of homeowners insurance, utility signups, cell phone plans, rental approvals, etc. Basically, it’s best to avoid default.
When delinquency becomes default
If you’re scheduled to make monthly payments on your loan, you’ll go into default when you fail to pay on your loan for 270 days. If you’re making payments less than once every month (it’s rare), you’ll default after 330 days.
Default sounds scary, and for good reason. Your unpaid loan balance, when in default, may become payable immediately–meaning you’ll owe the entire balance. You can lose your eligibility for deferment, forbearance, and repayments plans, as well as eligibility for additional federal student aid.
You’ll also be turned over to a collection agency, which will damage your credit rating and can impact your ability to make large purchases. The government can withhold your taxes and your student loan debt will increase, thanks to late fees, more interest, court fees, collection costs, lawyer fees, etc.–it really adds up.
If default goes far enough, your employer can withhold money from your paycheck and legal action can be taken against you, even preventing you from selling assets (including real estate!).
Watch out for errors
Even the government makes errors, so make sure you’re checking on the status of your loan. It may happen that you’ve been accidentally placed in default and still have time to correct the errors. Be in communication with your school, loan officer, etc. to make sure errors don’t happen and to correct them if they do.
What to do if you default
The simplest option for loan default is loan repayment. The FAFSA website contains a number of links to repayment information in a variety of circumstances.
You’ve got a few more options too. Loan rehabilitation is a great option for those struggling with repayment. Loan rehabilitation is contingent upon you and your lender agreeing on a payment plan that satisfies both your needs and theirs. Your loan is in rehabilitation once you’ve agreed upon payments and the loan has been purchased by a lender. Still, costs associated with collections may be added.
Unfortunately, payments collected as part of other measures taken (wage garnishment, etc.) don’t count toward your rehabilitation payments. After you’re formally in loan rehabilitation, you’ll again be eligible for some benefits–deferment, forbearance, payment plans, loan forgiveness, financial aid eligibility. Credit bureaus will be informed that you’re no longer in default as well.
It is important to remember that your monthly payment amount will probably increase once you’re out of rehabilitation, increasing your overall costs. Also, late payments reported prior to loan default remain on your credit report.
You also have the option to consolidate your loans, which can help get you out of default. When you consolidate a loan, you pay an outstanding balance on one or more loan in order to create a new loan with a fixed interest rate. A loan in default can be included in a loan consolidation after you’ve made a few voluntary payments–typically three consecutively.
Consolidation can come with collection and late fees too, which are added to the balance of your loan.
As you can see, going into default is a dangerous and costly thing to do. It’s obviously best avoided, if you can help it. If you feel like you’re struggling to pay off student loans, creating an open dialogue can go a long way. Remain in constant contact with your lenders and do your best to avoid a situation where you’re on the losing end.
Student loans are, or seem to be, an unfortunate part of today’s educational climate–and we’d hate to see your wealth diminish because of fear.
Remember our generic friend Jake from the beginning of our discussion? Jake was trying to buy a house and hadn’t had the courage to mention his student loan situation to his wife–and his credit was denied. Imagine her surprise–and his, as he had ignored the severity of the situation. Now, Jake is paying back student loans instead of the getting money back in tax returns, money meant for a family vacation.
Don’t be Jake. Plan ahead, and make sure you cover your bases, even in an uncertain job climate. Communication and careful planning are key–and it doesn’t hurt to have a little extra side income to help you out in uncertain economic times.
What’s your experience with student loans like? Please feel free to share any tips or tricks below!
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The Young Wealth Team