A recent report by the National Student Loan Cohort shows that the student loan default rate is slightly down from 11.5 percent to 10.8 percent in 2018, despite soaring education debt. Student loan default usually happens when you do not make a scheduled payment on your student loan for a period of at least 270 days.
Falling into default is something you should definitely avoid as this will be displayed on your credit report and will make it difficult to take out any loans in the future.
In this quick article, we will explain all the dangers of being in a defaulted student loan, and also provide with the best possible options to get your loans out of default.
Student Loan Delinquency and Default Consequences
Letting your student loans fall into default can be a serious issue for many reasons. First, it will have a negative impact on your credit which will prevent you from borrowing money, getting a house, or purchasing a car. There is going to be a negative flag on your credit report that your loans are in default.
Even when you paid off your defaulted student loan, your credit report will still have a note showing that you previously defaulted on a loan. Any new lender will be hesitant to approve you for any type of credit and this can stay on your credit for years.
1. Federal Student Loan Borrowing Limitations.
During default, you lose all eligibility for new federal aid. This can have a negative impact on borrowers who have taken out loans to obtain a degree and are unable to continue taking out loans to finish this degree due to federal aid borrowing limitations. The borrower will pretty much be stuck with the defaulted student loan debt, and not able to finish obtaining the degree that can potentially get a better paying job.
2. Not eligible for deferment and forbearance.
When you fall into default you will lose eligibility to place your loans in deferment or forbearance. And, this is very dangerous as these will be your 2 options for paying back the monthly payments for your loan during a financial difficulty. Deferment and forbearance are designed to allow borrowers put their monthly payments on hold during financial difficulties.
Reports show that many borrowers do not apply for these two benefits while they are eligible, but rather once the collection companies start to call and eligibility is not longer available.
3. Debt Collection
Letting your loans go into default will also cause your loans to be sold to a collection agency. Once the collection agency has your loans they will begin to call you none stop and track your financial situation to attempt to collect payments. Along with the harassing phone calls, the debt will come with collection fees added to your loan balance.
The collection agencies are allowed to charge reasonable fees as a commission for their services. This can create a lot of confusion to the borrower who if agree to pay the collection agency, will believe they are paying toward the loan when in fact they are only paying the fees without their student loan balance being paid.
Paying a collection agency could also have an increase in the total balance of the student loan. The accumulating interest on the loan and the collection fees combined are larger than the monthly amount being paid to collections, the loan balance will increase. That’s why It’s important to understand the Fair Credit Reporting Act for borrowers whose accounts have been transferred over to a collection agency.
4. Wage Garnishment.
This is easily one of the most frustrating issues when falling into default on your Federal Student Loan is that the Department of Education can have a wage garnishment order place on you until the loans are pay off. A wage garnishment is an automatic deduction directly off your paycheck that your employer must withhold from you.
A wage garnishment order can go as high as 15% of your paycheck. Once you have an active wage garnishment, your options become very limited. You can no longer consolidate your loans to get out of default, and your lender will not lift the banishment unless you enter into a rehabilitation program and make the satisfactory payments to get your loans back in good standing.
5. Tax Offset.
Coinciding with the wage garnishment, the department of education can and will refer your account to the IRS to offset any tax refund you may have by applying it to your loans. This means that any money you would normally have coming back to you in the form of a tax refund would instead be sent from the IRS directly to your student loan servicer to pay off the debt.
Also very important is that the IRS can and will apply your spouse’s tax refund to your loans if you are married and filing jointly. Even if your spouse does not have student loans, and is not a co-signor on the loans.
How to get student loans out of default?
1. Student Loan Rehabilitation
Getting your student loans out of default will require the borrower to be proactive and take action to get back into good standing. One option that’s available is a rehabilitation program.
Rehabilitation of the loan is a 9-month program where the borrower makes agreed-upon payments with the lender, and after all 9 payments are made on time, the default status is removed from the loan. The payment in the rehabilitation should be calculated the same as the Income-Based Payment is calculated.
If the borrower fails to make one payment, the rehabilitation would need to be restarted from the beginning. There are some positives and negatives in regards to loan rehabilitation that the borrower should understand prior to starting the rehabilitation.
2. Student Loan Consolidation
Another option is to consolidate your loan into the William D. Ford Direct Loan program. What happens in this program is that your federal defaulted student loans are all paid off and consolidated into one new loan, oftentimes with a new servicing institution.
You would have one brand new loan that’s in good standing, with a weighted average interest rate of your old loans. When consolidating you are also able to choose from a selection of repayment plan options, some of which can offer payments as low as $0.00 per month. This payment actually counts as a payment, unlike a deferment or forbearance which simply pauses the loan.
Often people can have $0.00 monthly payments for years, and any unpaid balance remaining on the loan is forgiven after 20-25 years. There are other student loan forgiveness benefits as well. Much like the rehabilitation program, there are positives and negatives with the consolidation as well that the borrower should fully understand prior to going through the consolidation process.
This could be another route you can take when attempting to get out of default.When you settle a debt, it means you pay off a portion of what you owe to the creditor. If you are using a debt settlement company, you make monthly payments to the company, who then takes your payments and deposits them into a savings account.
As you continue to make payments, the funds grow until the debt settlement company feels there is enough money to make a deal with the creditor to forgive a portion of the debt. That may sound very enticing, but that discount in debt comes at a very high cost.
4. Paying of the student loan in full
If you are looking for an immediate fix on a student loan default paying off the loan balance in full will get you out of default immediately.While this isn’t usually an option for most people (or they wouldn’t be in default in the first place), it can be an option if you find someone that is willing to co-sign a new private student loan for you.
If you have a friend or relative with a high credit score that’s willing to help you, there are many private student loan refinancing companies where you could refinance the loan to pay off your federal loans.
Finally, remember every case is different and if you still unsure of what options you have, a trusted and professional assistance with a free consultation to help you better understand your options can help you make a decision.