About Defaulted Student Loans

Most people, especially students, do not apply for loans with the expectation of defaulting on them. Defaulting on a student loan can be especially hard on young adults. They are just entering into the real world and will do so with a large blemish on their credit report, making it hard to obtain many of the things, such as cars, jobs and homes. There are options, however, that graduates should look into if they fall behind on their loan payments.

Significance

A student loan typically goes into a default status once the borrower has missed at least 9 months of payments. This is the case for federal student loans, which are lent by the government. The default period for private student loans may vary; the default process could start as soon as a few payments become delinquent. Though late fees may occur, the consequence of default will usually not occur if these payments are taken care of soon after late notices have arrived. For example, even though a loan may be categorized as being in a default period if the monthly payment was not received on time, the loan will not go into default if it is paid in a timely manner. With most private lenders, it will take many months for the actual default process to fully begin.

Prevention/Solution

Obviously, the best way to prevent a student loan default is to pay your loans on time every month. Be sure you know what day your payments are due, how to pay the payments and when the payments post to your account, meaning that even though you request an online payment on a Thursday, the payment may take a few days to process and may not post until the following Tuesday or Wednesday. Allow enough time for your payment to reach its intended receiver on time. If you have trouble making your student loan payments every month, discuss your problems with your lender. They may discuss a few options, such as deferring your payments for a certain period of time, consolidating your loans, reducing your monthly payments or switching to a lender that may be able to provide a more practical payment plan for you.

Warning

Once you default on a federal student loan, you are no longer able to apply for any other types of federal loans. Many people rely on federal loans to not only finance school, but to open up a business, get through a disaster or emergency, buy a home, obtain a mortgage, or conduct repairs or improvements to an existing home. If you default on a private student loan, the credit blemish that follows may deter other private lenders from lending to you in the future.

Features

If you default on your student loans, there are various ways for the lenders, as well as the government, to collect their debts. They may collect any tax refunds you receive, as well as garnish your wages by removing up to 15 percent of your disposable income from your paychecks. The government can also intercept any financial assistance it is providing you with, such as Social Security, retirement or disability benefits. If all else fails, your collectors can also sue you. Lawsuits are commonly filed by private lenders hoping to collect on your defaulted loan if you haven't responded to their collection agencies.

Considerations

If you default on a student loan, your lender will likely report the default to the credit bureaus. If you default on more than one student loan, the lender, or multiple lenders, will report each individual default to the bureaus. This will be recorded on your credit report, and can lower your credit score significantly, making it difficult to obtain credit in the future or purchase big-ticket items such as a home or car.

Resources

• Understanding Student Loans
• Addressing Your Defaulted Student Loan