Student loan default generally occurs on your student loans when you do not make a scheduled payment on your student loan for a period of at least 270 days. This default status will be displayed on your credit report and will make it difficult to take out any loans in the future. In this article, we will explain all the dangers of being in a defaulted student loan, as well as what the best options are to get out of default.
Dangers of a Student Loan Default
Having a student loan default can be a serious issue for a multitude of reasons. Firstly, it will negatively impact your credit which will make trying to borrow money very difficult in your future. You will have a note on your credit report that your loans are in default. Once your defaulted student loan is paid off, your credit report will reflect that the loan was paid off but will still inform any new lenders that you were once in default on that loan. This notation can stay on your credit for years.
1. Debt Collections
Falling into default on your federal student loans will also cause your loans to be sold to a collections agency. Once this happens, you will begin to receive many phone calls from the debt collector attempting to collect payments. Along with the harassing phone calls will come additional collection fees added onto your loan balance. The collection agencies are allowed to charge reasonable fees as a commission for their services. This can cause a lot of confusion for the borrower who if paying the collections agency, wrongly believes they are paying off their loans but may only be paying the fees without their student loan balance being paid down. In fact, it’s not uncommon for loan balances to increase while a borrower is paying a collections agency. If 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. Understanding the Fair Credit Reporting Act is important for all borrowers whose accounts have been transferred over to a collections agency.
2. Federal Student Loan Borrowing Limitations
While in default on your student loans you lose all eligibility for new federal aid. This can present a very large problem for borrowers who have taken out loans to obtain a degree, and are unable to obtain this degree due to federal aid borrowing limitations. The borrower is then stuck with the student loan debt, but without the ability to finish obtaining the degree and a better paying job.
3. Lost eligibility for deferments and forbearance
Default loans lose eligibility for deferments and forbearance. Again, this presents a very dangerous predicament for the borrower who is typically only faced with the option of paying back their loans during this financial difficulty. Deferments and forbearances are designed to allow people some breathing room on their loans while they are having these financial difficulties. The reality is that many borrowers are not applying for these benefit programs while they are eligible, but rather once the collection calls have started and the eligibility for deferments are no longer available.
4. Wage Garnishment
One of the most frustrating issues when falling into default on your Federal Student Loans is that the Department of Education can have a wage garnishment order placed on you until the loans are paid off. A wage garnishment is a deduction directly off your paycheck that your employer must withhold from you. A garnishment order can be as high as 15% of your paycheck. Once an active wage garnishment order has been put on your account, your options become very limited. You can no longer consolidate to get out of default, and your lender will not lift the garnishment unless you enter into a rehabilitation program and make satisfactory payments to get your loan 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 by 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 spouses 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.
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Fixing Your Student Loan Default
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. A 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 with 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.
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, often times 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 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.
3. Pay off The Loan in Full
Another option to fix a student loan default is to pay off the loan balance in full. 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.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
SoFi: Fixed rates from 3.890% APR to 8.074% APR (with AutoPay). Variable rates from 2.550% APR to 7.115% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.550% APR assumes current 1 month LIBOR rate of 2.50% plus 0.04% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.