Student Loan Default

Steps to Take Before You Default on Loan Repayment

Since 1990, the amount of federal student assistance borrowed under the Direct Loan Program and the Federal Family Education Loan Program (FFELP) has more than tripled. It is not hard to extrapolate that large numbers of college-aged borrowers are tasked with managing college debt, following school.

Several repayment plans are put-forth by the Federal Government, to keep borrowers on-track paying back loans.  The alternative, default, should be avoided at all costs, because the long-term impact is substantial.  Instead of defaulting, borrowers use built-in deferments, grace periods, and income sensitive repayment structures to stay current.

Default impacts students who can’t keep up with private loan payments, as well those delinquent on federal debt. Consider these consequences of student loan default:

• Reported to credit bureaus
• Wage garnishment
• Income tax refund garnishment
• Collections agents
• Credit in disrepair for years
• Loan repayment choices become much more limited

Even if you are expecting to file Chapter 13 or Chapter 7, find out why filing for bankruptcy will not cancel your student loans.

The promissory note you signed when you were approved for student loans is a legally binding financial document, which stipulates that payments of a certain amount be rendered to the lender, on time each month. Financial difficulties arise without notice.  A sudden change in your income, loss of employment, unanticipated personal expense, and a variety of other circumstances have the potential to undermine your otherwise well-balanced financial situation.

Several remedies exist for borrowers having trouble keeping pace with student loan repayment, each of which reduces the likelihood for default.

What Happens When You Default on Your Federal Loans?

When borrowers default on Stafford, Perkins or PLUS loans, any pre-existing repayment agreement is voided, and the entire balance of the loan is immediately called due by the issuing lending agency.  It is never too late to address slow payments, but once default occurs, the game changes for borrowers.

Whether your loan is public or private, administrators want you to keep pace with repayment, so they bend over backwards to modify payment structures and extend repayment terms.  Use the following strategies to stay current repaying student debt.

Before You Default

If you are struggling with loan repayment, face it head on, before default looms on your horizon. Excellent options that can save your credit rating, before you default:

• Flexible loan repayment plans
• Student loan consolidation
• Loan deferment
• Loan forbearance

Loan Repayment Plans

When you  borrowed money for school, you signed-up for a specific type of repayment plan: Standard, graduated, extended, or income sensitive. Significant alterations to your loan repayment structure are made by changing your repayment plan. If you are struggling to stay current, newly implemented payment structures may help create affordable monthly payments that keep you on course. For example, the Pay as You Earn Repayment Plan fixes your payment obligation at 10% of your discretionary income.  Using this formula, your payments go up as your income rises, allowing you to avoid default.

Loan Consolidation

If you have more than one outstanding federal student loan, and you are having difficulty staying current with payments, you may benefit from Federal Loan Consolidation.  The program allows borrowers to bundle existing debt under a single repayment umbrella.  The strategy reduces interest rates for some students, and allows loan repayment periods to be extended.

Participants agree to release previous loan conditions, which are replaced by the terms of the single consolidation loan.  As a result, it is important to analyze the impact of consolidation, before entering into an agreement.  In some cases, existing loans have better terms than the consolidation terms that replace them.

Use this self-assessment quiz; to find out right now if you are a candidate for loan consolidation.

Loan Deferment

As long as you are enrolled in college at least half-time, most loans carry deferment options, allowing you to place payments on hold.  For subsidized federal loans, repayment of principal is held-up until you graduate or drop below half-time enrollment - and the government pays the interest while you’re in school.

Unemployment deferment accommodates unexpected lapses in employment, stalling repayment obligations until gainful employment is secured.

Loan Forbearance

Loan forbearance is used to overcome short-term economic setbacks, which interfere with student loan payments.  Job layoffs and other short-term circumstances are hedged by student loan forbearance, which postpones interest and principal payments.  Unlike deferment on Federal Direct Subsidized Loans, forbearance does not include accommodations for government paid interest.

Economic Hardship

Economic hardship is present when ability to repay loans is hampered by low earning power.  Borrowers who are employed, but have incomes below accepted poverty levels, may qualify for concessions from lending agencies.  Cases are handled individually, and factors influencing each candidate’s ability to pay are considered.

Once you default, these loan repayment options may no longer be available to you.  It is important to take a proactive stance with lenders, to renegotiaste your student debt obligation, before delinquency leads to default.  Good faith attempts to remedy deficiencies are viewed favorably, as compared to shirking repayment responsibilities.