When you borrow a student loan, you sign an agreement promising to repay the amount you borrowed plus interest. If you fail to do this (or fail to meet other terms within your loan agreement), your loan can enter default.
Federal Direct and FFELP loans generally enter default if monthly payments are more than 270 days past due. Private loans and some federal student loans may have different time frames for default.
If you're struggling to make your loan payments, you're not alone. This is a common problem that you can overcome. The worst thing you can do is ignore your loans and hope they go away. They won't, and the situation can only get tougher the longer you wait to take action.
Default's consequences kick in quick. In default, your entire balance is due immediately, and the consequences include:
- Collection costs of up to 25% added onto what you already owe.
- Up to 15% of your paychecks being taken.
- Seizure of government payments like state and federal tax refunds, Social Security, and disability.
- Not being allowed to receive federal financial aid.
- Not being allowed to use lower payment options, deferment, or forbearance.
In addition, a defaulted student loan is one of the worst entries for your credit report. It can lead to:
- Your interest rates rising on existing loans and credit cards.
- Having to pay more for car or home insurance.
- Being unable to obtain or renew a professional license.
Be Money Smart
Collection costs can be added to your balance within 60 days to 90 days after your loan defaults. The exact percentage charged will vary depending on your lender, but it's generally at least 16% of your loan balance, and can be as high as 25%. You may be able to avoid these collection costs if you enter into a repayment agreement within 60 days of receiving the default notice. If you can’t do that, at least pay what you can to decrease the collections costs.
If your balance is $30,000 when you default, your costs would be $7,500. If you chip in just $250 a month during those 60 days, you'll knock those costs down to $7,375. That saved $125 may not seem like much—but if you're dealing with default, any little bit helps.
Recovering From Default
If your loans go into default, you have options that can help you recover. Doing these may help you avoid some of default's consequences, as well as allowing you to use the different repayment options available for federal student loans.
Borrowers can remove a loan from default in three separate ways:
- Paying the debt in full.
Each option comes with different costs and its own pros and cons. There isn't a right or wrong choice. Putting your loan back in good standing is a positive—no matter how you do it. Go with whichever method works best for you. To get started, contact your loan holder. If you aren't sure who that is, you can look it up in the National Student Loan Data System (NSLDS®).
How you can get a private student loan out of default isn't as clear as for federal student loans—but you can still do it. Again, start by talking to your loan holder as soon as you can about your options for fixing the default.