Understanding Student Loan Default and How to Recover

The U.S. Education Department indicates that 10% of student loan borrowers default payment within the first three years of the repayment period. While some people default for lack of other options, research shows a growing trend of student loan defaulters intentionally. The worst part about defaulting on student loans is the severe and long-term consequences. However, there are options available for student loan defaulters who want to get back on track.

What Is A Student Loan Default?

Student loan default is the failure to pay your student loans as stipulated in the loan’s contract. This may vary depending on the type of student loan you have taken.

Federal Student Loans: This type of loan turns default if you don’t make payments for 270 days or nine months. However, Federal Perkins loans can default if you don’t make a single scheduled payment on time.

Private Student Loans: These types of loans turn default if you duck three subsequent payments or after 120 days. However, it is advisable to check the timings in your loan’s promissory note because some private loans have specific terms.

Consequences of Default

There are various implications for defaulting student loans, which include:

  • You cannot receive any other federal student aid.
  • You lose the right to choose your preferred repayment plan or get a deferment.
  • The unpaid balance and interest become due.
  • It damages your credit rating, which may affect you when applying for a credit card or when purchasing a property.
  • A portion of your salary may be garnished and directed to your loan holder against your will as repayment for the defaulted loan.
  • Your school may withhold your academic transcripts until you are on good terms with your loan lender.
  • Your federal benefits or tax refunds may be withheld and directed toward servicing your defaulted loan in a process that is known as the Treasury Offset.

How to Know if Your Student Loan Has Turned Default

The best way to ascertain if your student loan has turned default is to confirm with your servicer. If you’re not ready to discuss your loans with your servicer or are unsure who they are, there are other options, such as

Get a Credit Report: A credit report shows all the loans you have defaulted on, private student loans or federal student loans.

Visit the Federal Student Aid website. If you are a federal student loan beneficiary, you can log into your Federal Student Aid (FSA) account and confirm your loan repayment status. Information about your servicer is also contained in this account.

Note: The information you get in the credit report and the FSA account may not be updated to reflect your student loans’ current state. Therefore, the best option for you is to check with your servicer.

What to Do if You Default Your Federal Student Loan

Defaulting your student loan may have severe consequences on your credit history and your future. However, there are measures you can take to get out of default, as discussed below

i). Loan Repayment in Full

Once your loan enters into default, the total amount becomes due. If you can afford to repay the entire loan all at once, your loan ceases to default, and you’re free from the debt.

You can also negotiate with your loan holder for a settlement that is less than the amount owed. However, don’t expect to save much from such an agreement.

ii). Loan Rehabilitation

Loan rehabilitation is one of the surest ways of getting your loan out of default. In this process, you agree in writing with your loan holder to make nine affordable loan repayments within ten consecutive months. Your loan holder calculates 15% of your yearly discretionary income and then divides it by 12 to get the amount you are supposed to pay every month. This means that you must provide recent documents showing your income to the loan lender.

If the loan holder determines a monthly repayment plan that you can’t afford, you can ask for an alternative plan that suits you. In this case, the loan holder will calculate the amount that remains from your monthly income after expenses before determining the alternative method. However, you will have to provide documents to show the income you get every month and the costs. On top of that, you’ll also have to fill out a Loan Rehabilitation: Income and Expense Information Form.

Upon duly completing the nine payments, your student loan will cease to be in default.

Loan Rehabilitation for a Federal Perkins Perkins Loan Beneficiary

Like in the federal student loan program, the loan holder determines the monthly amount you pay. However, in this case, the repayment period is nine consecutive months and not ten months.

What Happens After Loan Rehabilitation?

Upon completing the payments in full, you get to enjoy the following benefits:

  • Your loan will no longer show the default status.
  • All involuntary payments, such as the Treasury offset, stop.
  • Your credit history will no longer show the default record.
  • However, all records with the loan holder delivering your late payments before the loan turned default will still show.
  • You once again are eligible for benefits such as the freedom to choose repayment plans and deferment.

iii). Loan Consolidation

Loan consolidation is a faster way of getting out of loan default than loan rehabilitation. In this case, you are given a new consolidation loan to pay off your federal student loans.

To qualify for this plan, you can either:

  • Use an income-driven repayment plan to repay the new consolidation loan, or
  • Make three total, consecutive duly payments on your defaulted loan.

If you choose an income-driven repayment plan, you must provide documents showing your income. Also, you will need to select the available repayment plans during your application.

If you choose to make three duly payments before consolidating the defaulted loan, the loan holder is responsible for determining the amount you pay every month. However, the amount is often reasonable, depending on your financial capabilities.

If your salary or wages are already under garnishment as repayment of the defaulted loan, you cannot consolidate it. In such a case, loan consolidation can only happen if the garnishment is lifted.

Note: Under loan consolidation, the default record will still show in your credit history. However, you can still enjoy other benefits, such as additional student aid, deferment, and loan forgiveness.

The Bottom Line

If your student loan defaults, there are severe consequences that may affect you now and in the future. However, all hope is not lost. You can explore and choose one of the mentioned ways to get your credit standing back on track.