What to Do If You Have Defaulted on Your Student Loan Obligations
Defaulting on student loans has become inevitable for a certain segment of borrowers: according to a report by the Urban Institute , 1 million borrowers defaults on their loan payments every year, which is defined as defaults for almost a year, and around 40 are expected to default by 2023.
This will negatively affect your credit rating, deprive you of certain jobs, cause interest and charges to accumulate, lead to wage cuts, and exacerbate general financial anxiety. However, there are several different ways to get out of default, depending on the type of loan.
The ideal way, besides no default, is to pay off the entire balance in full. But this is obviously not an option for everyone. If you default, you have several other options.
Patience and procrastination
Call your service staff first (if you are not sure who your service staff are, check here ) to see what you can do with your repayment program. Obviously, if you default, you won’t be able to afford the monthly payments and your service agent will be able to put you on a more manageable repayment scheme. For example, some tracks limit your payments to a certain percentage of your income each month; you can also temporarily defer payments.
Federal and private lenders may allow you to defer loan payments or defer payments. Abstinence means that your payments are temporarily reduced, although interest continues to rise, while you may receive deferred cancellation of interest, depending on the type of loan you have . You will need to apply for your service provider before you default, and something that you are applying for will depend on factors such as your employment status and payment history.
Credit recovery
Next, we will deal with rehabilitation. It is offered to borrowers once and requires you to “agree in writing to nine voluntary, reasonable and affordable monthly payments (as defined by the loan holder) within 20 days prior to the due date” for a 10-month period in a row. In turn, the default mark is removed from your credit report (however, late payments will still appear in your credit history).
Your service staff will recalculate your monthly payment on this track, which could potentially significantly lower your payments in those nine months. However, remember that you can only recover each loan once.
Loan Consolidation
The second option is consolidation. This means that you :
- agree to repay the new direct consolidation loan in accordance with an income-driven repayment plan, or
- Make three consecutive, voluntary, timely, full monthly payments on the overdue loan before consolidating it.
If you choose one of these two options, you will no longer have a default, but a record of the default will remain in your credit history, as will late payments. Therefore, rehabilitation, although more laborious, is preferable to consolidation.
Once you are all right, take your repayment plan seriously and put any extra money into your main balance . You don’t want to be left behind again.