More than 1 in 10 federal student loan borrowers will default on their loans within three years.
Here’s what you need to know about how to avoid student loan default, your options if default occurs and how to get out of default.
What is default on student loans?
Student loan default means you broke your promise to repay the loans you borrowed to pay for college. It allows the lender to begin collection efforts.
Private student loans. You are technically in default one day after you miss a payment — there’s no delinquency period, as there is with federal student loans. Private lenders can technically sue you after you miss one payment, but lenders don’t typically jump to a lawsuit that quickly.
Other consequences of default include:
• You lose options to lower or suspend your payments, which are available only for borrowers in good standing
• You can’t take on additional student loans or receive other federal aid to return to school
• The loan holder can sue you or send private debt collectors after you
• The government can garnish or withhold your wages, tax refunds and Social Security payments
• Late fees and interest will build on your debt, raising the total amount you owe
• Your school can choose to withhold your academic transcript until your debt is repaid
How to avoid student loan default
Avoiding default begins as early as borrowing to pay for college. Once your student loans are due, you also have options to prevent late payments from happening.
• Opt for federal loans before private. Federal loans typically carry lower interest rates than private loans, so you’ll pay less over time. Unlike federal loans, private lenders will usually require a co-signer if you don’t have credit history. In addition, private loans generally have fewer repayment and forgiveness options if you have trouble making payments.
• Know what you owe. Your first loan bill will arrive six months after you leave school for any reason. Contact your college’s financial aid department to find out what loans you have. If you have federal loans, log into the National Student Loan Data System to learn more. If you have private loans, contact the bank, credit union or online lender you borrowed from.
• Estimate payments. When you know the principal amount, interest rate and repayment term on your loans, you can use a student loan calculator to estimate what your monthly payments will be.
• Create a budget. As soon as you know how much your payments will be, budget for them along with your other financial obligations. You may want to use the 50/30/20 budget: 50% of your take-home income goes toward essentials like minimum loan payments, 30% is for wants and 20% goes into savings.
• Choose a repayment plan. Federal loan borrowers can sign up for income-driven repayment, which caps your payments at a percentage of your discretionary income and lengthens your loan term. Depending on who your private lender is, there may also be repayment plans you can access for those loans.
• Consider deferment and forbearance. All federal and most private lenders offer deferment and forbearance options, which let you pause payments temporarily. It can give you breathing room to get back on track, but interest will continue to grow, so this option should only be used as a short-term fix.
What to do if you’re heading toward default
If it looks like default seems inevitable, the biggest mistake is to ignore the problem. If you miss a payment, contact your lender immediately to discuss your options.
Many private lenders will help you catch up on payments by temporarily lowering your monthly payment or allowing you to go into deferment or forbearance.
How to get out of default on student loans
If your student loans end up in default, there are different tactics to take for federal and private loans.
• Repayment is best if you can pay everything you owe upfront and want to get out of default as quickly as possible. But do not take on a personal loan in order to pay your debt faster. Personal loans typically carry higher interest rates than student loans. Explore other remedies that won’t put you in more debt.
• Consolidation is your next fastest route to exit default. First you must make three full, on-time, consecutive monthly payments on the defaulted loan. Then you can consolidate your loan or loans into a new Direct Consolidation Loan. Moving forward, you’ll make payments on an income-driven plan.
• Rehabilitation will help your credit score, but you can do it only once. Rehabilitation will wipe the default from your credit report, though any late payments that were previously reported will remain. You must make nine monthly loan payments within 10 consecutive months and be no more than 20 days late on any payment. Your new monthly payment will be 15% of your discretionary income, or you may request a lower amount.
• Catch up on loan payments. Default can happen immediately when you miss a private loan payment. But when you’re in default, it’s important to catch up on your loan payments. Otherwise, after 120 to 180 days of not receiving payment your loan is considered “charged off,” or uncollectible, and can be sold to a collection agency. Once sold, the charged-off loan is still owed to the new collection agency. A charged-off loan will remain a negative mark on your credit report for seven years.
• Contact a student loan lawyer. If you’re this deep into a private student loan default, it’s best to contact a lawyer who specializes in student loans. The private student loan market is especially complicated, so having someone who understands the system, your rights and your options is crucial.