What happens if you fail to repay your student loans?

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  • When your student loans are in default, it means you haven’t made payments for an extended period of time.
  • Defaulting on a student loan can hurt your credit and cause your employer to withhold part of your salary.
  • If your student loans are in default, there are ways to recover, including rehabilitation.

Student loans are a valuable tool to help you cover the costs of higher education, but they come with some risk. About a third of all federal student loan borrowers end up in default, which means they miss payments for an extended period of time.

You will face many consequences if you fail to repay a student loan. This can hurt your credit score, lower your income, and lower your tax refund and government benefits. If you haven’t paid off your student loans or are worried about having it, here’s what to do.

What does student loan default mean?

Your student loan is in default when you haven’t made payments for at least 270 days (on federal loans) or 90 days (on private loans) – although the exact number of days may vary by lender.

A default is not the same as a payment default. A default indicates non-payment for an extended period. Delinquency means you are behind on your payments, even if you are just a day past your payment due date.

“Student loans, like most loans, are considered delinquent as soon as one payment is overdue,” says Peg Keough, director of education at College Aid Pro. “The penalty for delinquency is often a late payment penalty or sometimes nothing more than a slap on the wrist ‘don’t start again’ if the overdue payment is paid short term.”

When you are delinquent, your lender will report the late payment to the three major credit bureaus – Experian, TransUnion and Equifax. This will likely hurt your credit score and make it harder for you to take out another loan, buy a house, or get a credit card.

How to check if your loans are in default?

If you think you have student loans in default but aren’t sure, there are several ways to check. To check for federal student loans, sign in to your StudentAid.gov account using your Federal Student Aid (FSA) ID. Once logged in, you can view the status of all your federal loans.

If you have private student loans, check your credit report to see if they are flagged as default. Every consumer receives a free annual credit report from each of the three credit bureaus. You can get yours at AnnualCreditReport.com. Your credit card company or bank may also offer free credit monitoring.

If you don’t see your private loans on the report, contact your lender directly.

“There’s a chance they fell off the credit report,” Keough says. “In this situation, it can be difficult to trace the default information. The likely scenario is that the lender will have sold the loan to a debt collector, who will be actively trying to find you.”

In some cases, your loans may default by mistake. Maybe you’re in school and should have been given a school deferment, or your duty officer has approved you for abstention and your payments are on hold.

If this happens to you, contact your school’s registrar and loans department.

“Be prepared to provide documentation, such as bank statements or forbearance agreements,” Keough says. “You should also contact the credit bureau and file a dispute.”

What happens when you fail to repay a student loan?

Once you are delinquent on a student loan, you will encounter some problems. Your credit score will likely take a hit, you could incur expensive late fees, and you might find lenders unwilling to approve you for loans and credit cards.

When you enter default, you will see more serious additional consequences. For instance:

  • Your entire loan balance can be acceleratedwhich means it – plus any interest you owe – will be due immediately.
  • You will lose your eligibility for federal loan benefits such as forbearance, deferment, and income-based repayment plans. You will also not be eligible for additional federal student aid.
  • The government can withhold your tax refunds and other federal benefits to clear your debt.
  • Your wages can be seizedwhich means your employer will withhold a portion of your paychecks to pay off your loan balance.
  • You could be sued. You may have to pay court costs, collect fees, attorney fees, etc.

Defaulting on a payment will also damage your credit, which could make it difficult to achieve other financial goals.

“For student borrowers who find themselves in default, the ramifications are not pleasant,” Keough said.

How to Get Student Loans in Default

If your student loans are in default, there are solutions. Although unlikely, you may be able to repay all of the debt. Otherwise, you can choose to rehabilitate your debt.

When you rehabilitate your loan, you regain access to many of the federal student loan benefits you were previously eligible for. This includes adjournment, abstention, forgiveness and access to future help.

“After your loan is rehabilitated, the federal government will remove the default from your credit history and return your loan to its current state,” says Mark Kantrowitz, student loan expert, author, and president of PrivateStudentLoans.guru.

The exact steps for rehabilitating a federal student loan depend on the type of loan you have. For Perkins loans, you will need to make full payments for at least nine consecutive months.

For Direct Loans and Federal Home Education Loans, these payments must be “reasonable” (not full payments) and submitted within 10 months.

If you have federal loans, the Fresh Start program is also an option to get you out of default. This program does not count as rehabilitation and:

  • Be sure to maintain access to federal loan programs
  • Stop collection attempts on your account
  • Give you access to future repayment options, such as income-based repayment plans, forbearance, deferment, and student loan forgiveness
  • Restore your ability to rehabilitate future loans.

To be eligible, your loans in default must be Federal Direct Loans, Federal Home Education Loans, or Perkins Loans. The Fresh Start initiative takes effect once the COVID-19 federal student loan repayment pause ends on December 31, 2022.

“When federal student loan repayment restarts, the Fresh Start initiative will return all federal student loans in default to their current state, remove the default from the borrower’s credit history, and remove other negative loan information. credit history,” Kantrowitz said. “Borrowers will have one year to choose a repayment plan and begin making payments under the repayment plan. Otherwise, default will be reinstated at the end of the one-year period.”

The last option is to consolidate your debt. With federal loans, this requires taking out a direct consolidation loan and then using it to pay off your entire loan balance. This essentially consolidates all of your loans into one loan, which simplifies repayment. With private loans, this simply means taking out a new, larger private loan – equal to the amount of your existing loan balances – and using that money to pay them off.

“This route is easier to follow than loan rehabilitation, but the benefit is primarily process simplification, not necessarily financial relief,” Keough said.

Can you discharge delinquent student loans in the event of bankruptcy?

Despite common misconceptions, it is possible for your student loan debt to be canceled by bankruptcy. This is true for private and federal student loans.

The process for doing this depends on the type of loan you have, the use of the funds, and your financial situation. In general, however, experts say the road is difficult.

“Perhaps the trickiest and most frustrating aspect of student loans is the difficulty in discharging them in the event of bankruptcy,” says Keough. “The sad reality is that the vast majority of student loans will still need to be repaid even after bankruptcy proceedings.”

To qualify for student debt discharge, your payments will have to pose what the US Bankruptcy Code calls “undue hardship.”

“It means you cannot maintain a minimum standard of living while repaying the loan, the situation is likely to persist, and you have made a good faith effort to repay the loan,” Keough said. “Few people will meet these strict standards.”

If you are considering going bankrupt, talk to a bankruptcy attorney first. They can advise you on the process and how it will affect your student loans.

About Judith J. George

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