How Can Borrowers Recover From Student Loan Default?
If you don’t make your loan payments every month, you could default on a student loan. 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 manager about forbearance, or refinancing private student loans (this probably doesn’t make sense. refinance federal student loans under current benefit extensions).
Before needing credit repair, consider other options with your student loan manager. Credible can help you explore options for student loan refinancing 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 a student loan default?
Student loan default occurs when you miss too many payments. Considering the large student debt that many Americans currently carry, this can become a common occurrence.
Specifically, if you do not make a loan payment for 270 days on your direct loans or federal family education loans (FFEL loans), you will be considered in default. With private student loans, the specific number of payments that you can miss before going into default varies by lender. It could be as little as three payments.
What are the consequences if I cannot repay a federal student loan?
If you fail to pay federal student loans, there are serious repercussions.
Federal student loan default affects a wide range of items. You could become ineligible to receive federal loans in the future, and your total current debt balance will become due immediately. You will not be able to change your repayment schedule or suspend or postpone loans. Your credit score will be damaged; the government could seize tax refunds or federal benefits, and your wages could be garnished. You could also be sent to collections and your school could retain your transcripts.
It is also possible that your professional license (if you have one) will be suspended.
What are the consequences if I cannot repay a private student loan?
When you default on a student loan on private student loans, there are serious repercussions too.
Your credit could be damaged by default reports and your lender will likely send you to collections. Your entire loan balance may become due and you could face legal action to collect which could lead to a court order to garnish wages.
How to recover from default on a student loan?
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 manager. Monthly payments equal 15% of annual discretionary income, which is based on poverty level. After you make your payments, you will no longer be in default and the default record is removed from your credit report – although late payments remain on your file.
- Student loan consolidation: You can apply for a direct consolidation loan and must either make three payments on time or apply for an income-oriented plan before proceeding with the formal consolidation. Once your loan is consolidated, you will no longer be considered in default and will once again be eligible for all the benefits of the federal loan. The default remains in your folder.
If you have private student loans, you will need to check with your lender. It is best to avoid this in the first place because there is no standard route out of default like there is with federal loans. Refinancing student loans before you miss a payment could help you avoid default. If you’re looking to potentially lower your private student loan repayments, refinancing them might be the way to go. Visit Credible to compare student loan refinancing rates and terms and explore options.
How to avoid defaulting on a student loan
Paying for your studies while increasing your credit is not 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 eligible for a deferral or withholding from suspending payments. Deferral may be a better option if you qualify because you will not owe interest on deferred subsidized loans. You can also choose a different repayment plan, including an income-based plan that caps payments at a percentage of income.
If you have private student loans, forbearance can still be an option to temporarily stop payments. But the forbearance policies of private lenders are generally not as generous as for federal loans.
Before you get out of default on several overdue loans, do your research. You could potentially avoid the fault if you refinance student loans. A lot financial experts recommend refinancing and with good reason. This can often drastically reduce your monthly payments, making them more affordable. There is, however, an important caveat: Since the payment of student loans and the deferral of interest on federal student loans end on September 30, 2021, now is not the right time to refi federal student loans ( borrowers will lose some benefits and protections like the utility loan (forgiveness). Now is the perfect time to refinance private student loans.
You can use an online tool like Credible to display a rate table that compares the rates of several lenders at once to see how your loan terms might change as you refinance. You can also use Credible’s online student loan refinance calculator to see what your new monthly payments would be after refinancing.
Going around the best student loan refinancing rates with Credible before your default, we hope you can find a new loan with payments that match your budget.