A student loan will go into default when you fail to make payments, and your account is 270 days delinquent. Once the loan is considered in default, the entire balance (principal, interest and collection fees) is immediately due and payable. If you default, it means you failed to make payments on your student loan according to the terms of your promissory note, the binding legal document you signed at the time you took out your loan. In other words, you failed to make your loan payments as scheduled. Your school, the financial institution that made or owns your loan, your loan guarantor and the federal government can all take action to recover the money you owe.
Ways to Avoid Student Loan Default
- Understand your rights and responsibilities regarding your repayment obligation as well as your repayment options.
- Borrow for college expenses only. Borrow only the amount you need and only what you can reasonably expect to be able to repay.
- Keep all records regarding your loan. Make copies of all letters, canceled checks and any documents you sign.
- Notify your lender or servicer when you have a change of address, phone number, or name. Also notify your lender or servicer if you change schools or your enrollment status changes.
- Seek help as early as possible if you have any difficulty maintaining your student loan repayment arrangement.
- Talk to your lender or student loan guarantor if you have any questions about the particular terms of your loan.
- Keep credit card debt to a minimum or avoid credit card debt completely.
- Create and maintain a budget that is within your monthly income.
- Consider making nominal loan payments while in school. This will reduce the amount you owe after graduation.
What are the Consequences of Loan Default?
The consequences of default can be severe:
- The entire unpaid balance of your loan and any interest is immediately due and payable.
- You lose eligibility for deferment, forbearance, and repayment plans.
- You lose eligibility for additional federal student aid.
- Your loan account is assigned to a collection agency.
- Your loan will be reported as delinquent to credit bureaus, damaging your credit rating. This will affect your ability to buy a car or house or to get a credit card.
- Your federal and state taxes may be withheld through a tax offset. This means that the Internal Revenue Service can take your federal and state tax refund to collect any of your defaulted student loan debt.
- Your student loan debt will increase because of the late fees, additional interest, court costs, collection fees, attorney’s fees, and any other costs associated with the collection process.
- Your employer (at the request of the federal government) can withhold money from your paycheck and send the money to the government. This process is called wage garnishment.
- The loan holder can take legal action against you, and you may not be able to purchase or sell assets such as real estate.
- Federal employees face the possibility of having 15% of their disposable pay offset by their employer toward repayment of their loan through Federal Salary Offset.
- It will take years to reestablish your credit and recover from default.