Student loans must be repaid and will not simply go away by being ignored. Loans first become delinquent when you miss a payment. The time between delinquency and default depends on your lender. With some private lenders, your loan might go into default very soon after. Details about missing payments or defaulting are described in your loan terms, or you can ask your private lender for clarification.
Federal student loans go into default when you do not make any payments for 270 – 330 days, depending on your repayment plan. Defaulting on your student loans can adversely affect your credit score for years, which can make it difficult to rent an apartment or enter into other binding agreements. If you suspect you will have problems making payments, there are graduated, income contingent, and income-based repayment plans that start you off with lower payments which gradually increase over time. Deferment allows you to postpone repaying your loans, and forbearance lets you temporarily reduce or stop payments and make changes to your repayment period. Learn more about >> Student Loan Default <<
If your federal student loans go into default, several things can happen:
- You will immediately owe the entire remaining balance of your loan, including interest.
- You will be ineligible for deferment, forbearance, and special repayment plans on your existing loans. You will be denied any additional federal student aid.
- Your loan status will be reported to credit bureaus and a collection agency.
- Your employer could garnish your wages, or withhold money from your paychecks at the federal government’s request.
- You could lose federal and state tax refunds to tax offsets, meaning the funds will be used to pay your debt.
- You will be liable for all costs associated with loan default, like court costs or collection fees.
- Your loan holder might sue you or take other legal action.
There are three main ways to resolve defaulted federal student loans, including:
- Loan repayment: Paying the entire amount of your defaulted loan can clear your name.
- Loan rehabilitation: Rehabilitating your loan helps remove default status. After you and the U.S. Department of Education agree on a repayment plan, you must make voluntary payments on time and have your loan purchased by a lender. Your debt might grow due to charges incurred by collection costs, but once it is out of default, you will again be able to choose from any of its original repayment plans. Additionally, any income or tax withholdings will end and your credit status will be updated.
- Loan consolidation: Consolidating your loan can not only get you out of default but also let you pay off your debt with a single monthly payment. You must make at least three consecutive, voluntary, timely payments once you and the U.S. Department of Education agree on a repayment plan.
Loan default can follow you for years and jeopardize your ability to make future purchases due to your bad credit score. Emotionally, it can be draining to deal with collection agencies and court appearances. If you have problems repaying your loans, get help as soon as possible. Ignoring debt never makes it go away and can in fact limit your options to resolve it.