How to Navigate the Consequences of Defaulting on Your Student Loans

Defaulting on a student loan will have a significant impact on your immediate and long-term financial outlook. Your credit score will be damaged for 7 years, you may have your wages garnished and you could struggle to get access to credit.

What Are the Consequences of Student Loan Default?

Defaulting on your loans has serious consequences for your financial future. Here are the most common issues you can encounter for federal and private student loans.

  1. Acceleration: Your lender can call due to the entire unpaid balance on your loan plus any interest owed – you will be required to pay the lender back immediately.
  2. Collections: Your lender may place your loan with a collection agency, who will attempt to collect the repayment on the lender’s behalf. You will be responsible for any additional costs incurred by the lender.
  3. Loss of privileges to adjust your repayment: Once you’re in default, you’re no longer eligible to apply for a deferment or forbearance, and you can’t change your repayment plan.
  4. Loss of loan eligibility: If you’re still in school or planning to return, your plans can be interrupted because you’re no longer eligible for new loans.
  5. No issuance of transcript: Your school may refuse to issue your transcript.
  6. Credit score drop: When the default gets reported to the credit bureaus, your credit score is damaged.
  7. Treasury offset: Your tax refunds – and a part of your spouse’s tax return if you’re filing together as well as any federal benefits you receive can be intercepted and applied to your loans.
  8. Wage garnishmentYour employer may be ordered to withhold up to 15% of your paycheck and send it to your lender.
  9. Legal fees: You may have to go to court and pay all the associated collection costs and fees.
  10. In-ability to buy or sell assets: You may not be able to buy or sell assets like real estate, including your home.

How Long Does It Take For A Student Loan To Go Into Default?

How long to get reported to credit bureaus?

Even if you’re just one day late with a payment, your loan is delinquent. You’re subject to late fees and other penalties until you bring it current again. This is true even if you miss just one payment and start paying again the next month. Once your account reaches 90 days delinquent, your loan servicer can report this to the three major credit bureaus.

That’s a significant ding to your credit score, which can keep you from getting a loan for a home or car. It can also interfere with getting a credit card, a cell phone plan, utilities, car insurance, or an apartment.

How long for a delinquent loan to be reported as defaulted?

At a given point, if your loan is still delinquent, it goes into default. How long a loan takes to go into default depends on the type of loan you have.

  • If you have a loan through the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program (FFEL), your loan goes into default if you are delinquent for 270 days.
  • For Federal Perkins loans, the lender can find you in default if you miss or are late with any single payment.
  • For private student loans, the amount of time for a lender put your account into default may vary but typically it is around when the loan is overdue for 120 days – about three months.

How Defaulting Impacts Your Credit Score?

Given the many factors that go into your credit score, it’s impossible to say just how many points you will lose from defaulting on a student loan. Your payment history makes up 35% of your credit score, which is the largest share assigned to any category. In most cases, the result will be a significant and sizeable drop credit score, something that will take years to repair.

The default will appear on your credit score for seven years. A negative credit score will affect your ability to do the following:

  • Rent an apartment or buy a house
  • Buy or lease a car
  • Get a cell phone plan
  • Sign up for utilities (gas, electric, water)

Most employers will, in general, not be able to view that you have a default in your credit history, in accordance with Fair Credit Reporting Act limitations. There are also other limitations around viewing credit reporting information, at state levels. However, if you’re seeking employment with a lender or a credit reference agency, they may request your permission to view your credit history.

Avoiding Default on Federal Student Loans

There are four primary options available to you if you find that you are struggling to make your monthly loan payments:

Apply for an Income-Driven Repayment Plan: If you’re approved for an income-driven repayment plan, your monthly payment will be reduced to what you can afford to pay, which is usually 10% of your monthly income.

Forbearance or Deferment: If you’re unable to meet your monthly loan payments due to circumstances beyond your control, or you have decided to return to school, you may be eligible for a temporary suspension of your student loan.

Loan Forgiveness: If you work in public service, or if you’ve been a qualified teacher at a low-income school for at least five years, you may be eligible for loan forgiveness. You can learn more about loan forgiveness here.

Appealing the default: If you believe that your account has been incorrectly placed into default, you can contact your loan servicer and provide evidence that met your obligations as a borrower.

Avoiding Default on Private Student Loans

If you’ve been notified that your federal or private student loan has gone into default, make sure to take action quickly.

If you’re being sued, or you’re not comfortable facing the challenges of loan default on your own, you may want to consider a lawyer who specializes in student loans. They can help you understand your options, lend guidance, and draw up any required documents.

There are two primary options available to help borrowers avoid defaulting on private student loans:

Repayment Assistance: Depending on the circumstance, lenders may be willing to temporarily reduce your monthly payments in a form of forbearance or adjust your repayment obligations, depending on your unique circumstances. Contact your lender to find a mutually beneficial solution to temporary difficulties or special circumstances.

Refinance your loan: When you refinance a loan, you’re taking out a new loan to cover the cost of your existing loan. Newer loans sometimes offer better terms than pre-existing loans, so refinancing could be a good option if you’re struggling to meet your monthly payments.

How do I repair my credit score after student loan default?

Rebuilding your credit score after defaulting on a student loan is a slow process, but it is possible. Take these steps to begin repairing and then start rebuilding your credit score:

  • Get your student loan out of default
  • Check your free annual credit report for errors with a reputable service like Annual Credit Report. Some banks offer free monthly credit scores, which may be useful to monitor your progress regularly and take further steps to repair your credit score should it be necessary.
  • Start some positive credit history. Consider a solution like a secured credit card to build some new positive credit history but be sure to do full research on your options before you take on this step and only consider taking on a new line of credit after you’re confident that you can meet new repayment obligations.
  • Set up payment reminders or use a budgeting app to help you make on-time repayments and manage your budget.
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