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How to Deal with Student Loan Default

Written by Mark Kantrowitz | June 1, 2020

A borrower asks about their options when a student loan goes into default. The borrower says that he can’t afford to pay the amount they want each month, but wants to get out of this hole.

It takes 120 days of non-payment for a private student loan to go into default and 270-360 days of non-payment for a federal student loan to go into default.

Before your student loans go into default, talk with the lender, tell them about your situation and ask about your options.

Options for Avoiding Student Loan Default

A borrower should consider deferments and forbearances, which temporarily suspend the repayment obligation.

Borrowers can also consider alternate repayment plans, which reduce the monthly loan payment by stretching out the term of the loan.

These options are better than default. You lose the option for deferments and forbearances if you default first.

Loan Calculator: Use this loan calculator to determine the monthly loan payment and total payments on your student loans, auto loans and mortgages, based on the loan amount, interest rate, loan fees and repayment term.

What Happens When You Default on Student Loans

After a federal loan goes into default, the federal government may garnish up to 15% of your wages administratively. They can also offset your income tax returns and up to 15% of Social Security disability and retirement benefit payments.

Once you default on federal student loans, you will lose eligibility on any further federal student aid.

Your credit will be ruined. A fifth of every payment will be deducted for collection costs before the rest is applied to interest and principal. This will slow the repayment trajectory of the loan, so it will take you longer to pay off the debt.

Private student loans can garnish your wages (up to 25%) and seize assets after they sue you and get a court judgment against you. They can also assess collection charges.

For private student loans, if you had a cosigner on your loan, their credit will be negatively impacted as well.

How to Get Student Loans Out of Default

If you want to get out of default on federal loans, you have a one-time opportunity to rehabilitate the debt. Rehabilitation involves making 9 out of 10 consecutive, full, on-time, reasonable and affordable monthly loan payments. Reasonable and affordable payments are usually based on the monthly loan payments under an income-driven repayment plan, but can be less in certain extenuating circumstances.

Once the loans are rehabilitated, the default will be removed from your credit history and you will be able to switch into an income-driven repayment plan. Collection charges will be added to the loan balance, but at 16% of the loan balance, as opposed to 25%. In some cases the collection charges will be waived.

If you default again after rehabilitating your loans, your only option will be to pay off the debt in full.

Private student loans do not have the same options as federal student loans, but borrowers have been able to ask for the default to be removed from their credit history. Lenders will often do this if the borrower signs up for AutoPay and has successfully made several payments.

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About the author

Mark Kantrowitz is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make informed decisions about planning and paying for college. Mark writes extensively about student financial aid policy. He has testified before Congress and federal/state agencies about student aid on several occasions. Mark has been quoted in more than 10,000 newspaper and magazine articles. He has written for the New York Times, Wall Street Journal, Washington Post, Reuters, Huffington Post, U.S. News & World Report, Money Magazine, Bottom Line/Personal, Forbes, Newsweek and Time Magazine. He was named a Money Hero by Money Magazine. He is the author of five bestselling books about scholarships and financial aid, including How to Appeal for More College Financial Aid, Twisdoms about Paying for College, Filing the FAFSA and Secrets to Winning a Scholarship. Mark serves on the editorial board of the Journal of Student Financial Aid and the editorial advisory board of Bottom Line/Personal (a Boardroom, Inc. publication). He is also a member of the board of trustees of the Center for Excellence in Education. Mark previously served as a member of the board of directors of the National Scholarship Providers Association. Mark is currently Publisher of PrivateStudentLoans.guru, a web site that provides students with smart borrowing tips about private student loans. Mark has served previously as publisher of the Cappex.com, Edvisors, Fastweb and FinAid web sites. He has previously been employed at Just Research, the MIT Artificial Intelligence Laboratory, Bitstream Inc. and the Planning Research Corporation. Mark is President of Cerebly, Inc. (formerly MK Consulting, Inc.), a consulting firm focused on computer science, artificial intelligence, and statistical and policy analysis. Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU). He has Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU. He is also an alumnus of the Research Science Institute program established by Admiral H. G. Rickover.

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