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Student Loan Default: The Dangers and How to Get Out

April 8, 2020

Here’s a fact: Each year more than 1 million student loan borrowers default.

And by 2023 almost 40% of borrowers will have a defaulted loan.

(The default rate is even higher for borrowers who went to for-profit colleges.)

I tell you this because too often a borrower contact me embarrassed and beating herself up because she has a defaulted loan.

My response: Stop. First, you’re not alone. Second, it’s not as if you did it on purpose. Third, it’s already happened. Your focus now needs to be on getting your loans out of default and back into a plan with affordable monthly payments.

In this post, I’ll go over how you can recover from student loan default.

The Two Types of Student Loans

Broadly speaking, there are two types of student loans: federal and private.

Federal Student Loans

Federal student loans are loans made under the federal government’s Federal Student Aid program. Under that program, there are a bunch of loans with different names:

  • Direct Loans (both subsidized and unsubsidized)
  • Federal Family Education Loans
  • Stafford Loans
  • Parent Plus Loans
  • Perkins Loans

You got these loans after filling out a FAFSA form and submitting it to the Department of Education.

Federal student loans qualify for income-based repayment plans. They’re eligible for cancellation and forgiveness programs. And when you die, they simply go away. They do not follow your loved ones.

Those are the good features of federal student loans.

There are two bad features though.

First, federal student loans don’t have a statute of limitations. They will follow you into your retirement years. But don’t worry, you can still get social security even though you owe federal student loans.

Second, when you default, the government has super collection powers. They can garnish your wages, take your tax refund, and deny you from getting future financial aid.

And they can do all those things without a court order.

Private Student Loans

A private student loan is any student loan made outside of the Federal Student Aid program.

Typically, private student loans are made by banks, credit unions, charitable foundations, etc.

Read Full Article: Here’s How to Avoid The Consequences of Private Student Loan Default

Here are the main things to know about private student loans:

  • they typically do not offer repayment plans based on your income
  • they typically do not offer forgiveness programs
  • they’re subject to a statute of limitations
  • they do not offer loan rehabilitation programs if you default
  • they cannot garnish your paycheck or levy your bank account unless they sue you and get a court order to do so
  • when you die, they may go after money and property you left behind for your family.

What is Student Loan Default

Generally speaking, student loan default occurs when you fail to make a payment on your loan and you weren’t in a deferment or forbearance.

This definition works for private student loans, but not for federal student loans.

You default on a federal student loan once you’ve missed 9 months of payments (270 days). Until then, your federal student loans are delinquent but they’re not in default.

The biggest difference in delinquency vs default is the government’s collection powers.

When your loans are delinquent, your loan servicer (FedLoan, Navient, Nelnet, etc.) cannot forcefully collect from you. They can only demand payment and send negative information to the credit bureaus.

But with a defaulted loan, your loan servicer can cause your account to be sent to collections. And that’s when you have to worry about wage garnishment, social security offset, drop in credit score etc.

What are the Best Ways to Prevent Student Loan Default?

The best way to prevent student loan default is to make your monthly payments.

With private loans (and sometimes federal student loans) that’s not always possible.

Sometimes there’s simply not enough left over to make your student loan payments — at least not what they’re asking for.

Deferments and forbearances can help — in the short term.

In the long term, they can cause you tremendous financial hurt by causing your loan balance to balloon quickly.

Deferment + Forbearance

Both a deferment and forbearance temporarily stop your monthly payments and can allow you to catch up on late payments. Those are good things. The bad thing is that when you use them this way, the unpaid interest and loan payments get added to your principal balance through student loan interest capitalization.

So what do you do if you want to avoid defaulting on your debt?

The most important thing you can do is to make sure you truly can’t afford the payments.

I meet a lot of borrowers who were told by their servicer that their payments would be X dollars per month.

(I see this a lot with Parent Plus Loan borrowers who end up defaulting because they’re given bad information about their payment options.)

But when I look at their situation closely, I find out their payments would actually be a lot lower if they counted their family size correctly and chose the best repayment option for their loans.

Sidenote

Again, this option works great for federal student loans, which offers awesome loan repayment plan options based on income. With private student debt, your best bet (aside from refinancing) is to use your deferment and forbearance options and when those end, ask to pay under an income rate reduction plan.

This discrepancy in payment amounts usually makes sense to me.

You see, when you call your loan servicer and ask them about repayment options, the rep goes simply runs through her script.

It’s not as if she has a deep knowledge of repayment plans.

The rep is simply asking the questions in her script and repeating second-hand knowledge of what she thinks the rules say — not what they actually say.

How to Find Out if Your Loans are in Default

Other than checking your credit report, there’s no easy way to find out if you’re in default with a private student loan. You have to call the loan servicer handling your loan and find out the loan status.

Finding out if your federal student loans are in default is much easier. To do that, you just need to create a Federal Student Aid ID and then visit the National Student Loan Data System.

The NSDLS website has a list of all your federal student loans and their statuses.

Any loan with a ⚠️ next to it is in default.

What Happens When You Default on Student Loans

When you default on a student loan, your loan will be sent to collections and negative information will be sent to the credit bureaus, which will tank your credit score.

Related: When Student Loans are Killing Your Credit Score: A Guide

What happens next depends on whether your loan is federal or private.

Federal Student Loans

When you default on a federal student loan, two things happen.

First, your loan servicer will send your loan to the Department of Education’s collection unit: The Default Resolution Group/Debt Management & Collections System.

From there, the DRG will either keep your loan or send it to a private debt collection agency.

If sent to a debt collection agency, you’ll need to contact that agency to learn your options for getting out of default.

Second, your loan balance will balloon. A default triggers the interest on your loan to be added to your principal balance and collection fees to be assessed.

I’ve seen many borrowers see their loan balance go from $30 thousand to $70 thousandwhen they default.

Thankfully, the government is willing to waive the collection fees if you get out of default.

Private Student Loans

Once in collections, the threatening phone calls and letters will ramp up. They’ll call you, your mother, your ex, your job, etc. They’ll ask you to pay an absurd amount of money in a short period of time and threaten a lawsuit if you can’t.

They’ll do all those things because that’s all they can do to collect on a private student loan. They can’t forcefully take any money from you, so they have to try and bully you into a payment.

And if bullying doesn’t work?

Then your loan may be sent from a collection agency to a law firm. The law firm will typically have the authority to sue you if they can’t collect.

Private student loans can’t forcefully take any money from you, so they have to try and bully you into a payment.

How long does it take to be sued after you default on a student loan? It’s unclear. There’s no universal period of time. In my experience, however, more than 2 years will have passed since you’ve defaulted before you’re sued.

How to Get Out of Student Loan Default

You typically have two options to get out default on a federal student loan:

  1. Consolidation or
  2. Rehabilitation

In the battle of consolidation vs. rehabilitation, one isn’t necessarily better than the other.

Consolidation is faster and often easier than loan rehabilitation, which can get really difficult if you don’t understand the loan rehabilitation process.

Beware with Rehabilitation

Many borrowers have reached out to me because they thought they were enrolled in the rehabilitation program only to find out they weren’t because they didn’t return the loan rehabilitation agreement letter or other paperwork. If you decide to rehabilitate your loans, call and confirm the collection agency has all the paperwork and that you’re approved for the program.

But speed and ease come at a cost. Namely, your loan balance will almost always be a lot higher with consolidation than with rehabilitation. Consolidation causes both your unpaid interest and collection fees to be added to the new principal balance of your Direct Consolidation Loan.

So if you don’t need to get out of default quickly to go to school or get your tax refund back, rehabilitation may be the better choice for you.

Related: How to Get a Lower Monthly Payment With Student Loan Rehabilitation

If you do choose rehabilitation, make sure you follow these steps after you complete the loan rehabilitation program.

Private

Private student loans don’t have loan rehabilitation programs and you typically won’t find a lender willing to refinance a student loan that’s in default.

Because of that, you have two options to get out of default on a private student loan:

  1. Pay the past-due payments or
  2. Pay the loan balance off, either in full or by settlement

The 5 Steps to Getting Federal Student Loans Out of Default

There are 5 steps to getting out of student loan default:

  1. Identify all of your federal student loans.
  2. Check to see which loans are in default.
  3. Learn who has your defaulted student loans.
  4. Confirm your options for getting out of default.
  5. Complete loan consolidation or loan rehabilitation.

Pro-tip: When you have more than one student loan in default, make sure the collection agency you’re working with has all of your loans that are in default.

I’ve had several clients who thought they entered into a rehabilitation agreement for all their loans, only to have their tax refund taken a second-time because they still had loans in default.

Pro-tip: When you have more than one student loan in default, make sure the collection agency you’re working with has all of your loans that are in default.

The easiest way to identify which debt collection agency(s) has your loans is to use the National Student Loan Data System.

National Student Loan Data System [NSLDS] homepage

When you login, your loans that are in default will have this icon ⚠️ next to them.

Next, click on the number next to your loan and then scroll to the bottom of the page.

Gif showing how to find defaulted federal student loans
You’ll see the current loan servicer, loan holder, and, depending on the type of federal student loan you have, a guaranty agency.

Related: Q: How to Stop a Student Loan Garnishment from Trellis

In my experience, you may need to contact each of the listed companies to find out who has your defaulted loan.

For many of you, you’ll need to contact the Default Resolution Group/Default Management and Collections System.

When you call them, you’ll be prompted to enter your social security number and date of birth. If you do that, you’ll be told you need to contact the private collection agency handling your loan.

While that’s great information, it may not be complete.

Your defaulted loans may be with more than one collection agency. The automated message won’t tell you that. So don’t rely on it. Speak with a live operator. You can do that by not putting your SSN/DOB into the system. Wait, and you’ll be connected to a live operator.

Confirm with the live operator how many defaulted loans you have and which collection agency has them.

How Long Does it Take to Get Student Loans Out of Default

Getting out of default on a student loan can take 1 day or it can take 10 months. How quickly you get out of default depends on whether you’re in default on a federal loan or private loan and which option you choose to get out of default.

Private

You can get out of default with a private student loan in one day. To do that, you’ll typically need to make all of your past due payments. Occasionally, you can avoid doing making those payments and still bring your loan current by asking for a forbearance.

If that’s an option, a forbearance will be applied to your past due payments thereby getting you out of default.

While this sounds great, there is a drawback: the past due payments will likely be added to your principal balance. That means from then on, you’ll be paying interest on interest.

Federal

Federal student loans offer two options to get out of default: consolidation and loan rehabilitation.

A Direct Consolidation loan will get you out of default in about 2 to 3 months.

Related: Should You Consolidate Defaulted Student Loans? There’s One Big Reason Not To

The loan rehabilitation program will get you of default in about 9 to 10 months.

Related: How to Get Student Loans Out of Default Quickly

The Government’s Special Powers to Collect Defaulted Student Loans

The government has special powers to collect defaulted student loans. These special powers are why if you have to choose between defaulting on a federal student loan or a private student loan, default on the private loan. Private student lenders have limited powers to collect from you.

Private student lenders have limited powers to collect from you.

When you default on a federal student loan, the government can:

  • issue an administrative wage garnishment order
  • offset your tax refund
  • offset your Social Security benefits
  • deny you from getting new federal financial aid
  • prohibit you from being eligible for loan forgiveness programs
  • make it difficult for you to get approved for a mortgage

What Happens When You Twice-Defaulted on a Federal Student Loan

After your second default on the same federal student loan, you’re no longer eligible for the loan rehabilitation program.

Your best option to get it out of default is a Direct Consolidation loan.

Consolidation may be an option if (a) you have another loan to consolidate it with, and (b) you’re wages aren’t being garnished for that loan.

Twice-Defaulted FFEL Loan

If the loan you’re in default with is a Federal Family Education Loan, then you don’t need another loan to consolidate it with. You can consolidate that loan by itself into a Direct Consolidation Loan.

If both of those statements are true, then you can consolidate your loan(s) out of default.

But if one or both is false, then your only option to get out of default on a twice-defaulted federal student loan is to file a chapter 13 bankruptcy.

Chapter 13 bankruptcy laws have a special rule that may allow you to get the loan out of default and into an income-driven repayment plan.

Speak with a bankruptcy attorney near you to see if this is an option for you.

How to Stop a Garnishment

You can stop a student loan garnishment before it starts by consolidating your defaulted loan or setting up a voluntary payment agreement. The loan rehabilitation program is one type of voluntary payment agreement.

Read Full Article: How to Stop a Student Loan Garnishment

After a garnishment starts, you may be able to stop it by entering into a loan rehabilitation agreement.

The garnishment will continue until (1) you make 5 monthly payments under the rehabilitation agreement and (2) return the signed rehabilitation agreement letter.

You have to make each monthly payment within 20 days of its due date. Because of that, the soonest you’ll stop a garnishment is after 4 months of payments.

What Happens After You Get Out of Default

Here’s what happens after you get out of default:

#1 You’re No Longer Able to Settle

If you’re looking to payoff your federal student loan debt in one lump sum but you want a discount, you’ll want to negotiate a settlement while you’re in default. Once you’re out of default, you’ll no longer be able to settle your loans. You’ll have to pay the balance in full.

So if you want to settle, but you need time to come up with the money, you may want to keep the loans in default.

If you do that, I suggest you set up a voluntary payment agreement — not a loan rehabilitation agreement. Doing that will keep you in default but will prevent wage garnishment. (It won’t stop your tax refund from being offset, however.)

Related: How to Know if Student Loans Will Offset Your Tax Refund

#2 You Regain Eligibility for Federal student aid

You can start getting federal student aid after you’ve made six consecutive payments within 20 days of the due date set in your loan rehabilitation agreement.

#3 wage garnishment Stops

You can stop wage garnishment before it starts with loan rehabilitation or consolidation.
After it starts, you can suspend a wage garnishment after you’ve made your 5th rehabilitation payment.

#4 your Credit report updates

With rehabilitation, the default status is removed from your loan. But with consolidation, the default status remains, the defaulted loan is closed, and a new tradeline appears. Under both rehabilitation and consolidation, the late payments will remain a part of your credit history.

#5 you Regain eligibility for IDR and forgiveness

After you get out of default, you can start repaying your loans under an income-driven repayment plan. That makes you eligible for income-driven forgiveness and other forgiveness programs like Teacher Loan Forgiveness, and Public Service Loan Forgiveness.

How to Stay Out of Default

Once you get out of default, your immediate goal has to be to avoid defaulting again. Here are a few suggestions on how to do that:

#1 Enroll in an Income-Driven Repayment Plan

Whether you rehabilitated or consolidated your loans into a Direct Loan, your goal is to get and keep your loans in an affordable repayment plan. Now that you’re out of default, you have your choice of repayment plans. Your best bet is likely going to be choosing one of the income-driven repayment plans.

Each of the IDR plans (REPAYE, PAYE, IBR, and ICR) allow you to make a monthly payment based on your adjusted gross income, loan balance, and family size.

Which one is right for you, is hard to say. So many factors go into choosing the right IDR plan (marital status, loan balance, income, etc.).

Let’s talk if you’d like some help choosing.

#2 SET UP AUTOMATIC PAYMENTS

Let me share a secret with you:

Every few months, I’m a day late with one of my credit card payments.

It sucks. But it happens. I have like 7 credit cards. And none of them are on auto-pay. I’m a control freak.

Because I’m a day late every now and again, I end up paying a late fee. And that late fee is usually $35.

Of course, I can easily avoid that by enrolling in autopay. The same is true of you and making your student loan payments.

You’ve already defaulted once. Don’t let that happen again. Enroll in autopay.

#3 TRACK YOUR LOANS

Every few months, take a look at your loans to make sure nothing wonky has happened.

By wonky, I mean that your payments are being properly applied, you’re getting credit for any forgiveness, and your loans haven’t been sold.

With federal student loans, tracking your loans is pretty simple. Visit the US Department of Education’s National Student Loan Data System. Unlike your account with Great Lakes or FedLoan, the Data System has information about all of your federal student loans — not just the loans your servicer has.

Tracking private student loans is a lot harder. The best way I know to track private loans is to call your loan holder once or twice a year and confirm they still have it.

You would think you can avoid doing that if they’re accepting your payments. But experience suggests otherwise. Navient took my client’s payments for almost 2 years before sending her a check for those payments and a letter saying it sold her loan to National Collegiate.

#4 KEEP RECORDS

Trust this:

No one cares about your student loan debt as much as you do.

Not your servicer. Not your loan holder. Not anyone.

You’re the one burdened with the debt. Because of that, you need to keep up with your paperwork.

No one cares about your student loan debt as much as you do.

Over the years, your servicer will say you didn’t send them your IDR application or your recertification paperwork, or deferment or forbearance request, whatever.

Your records will save you in those situations.

I can’t even begin to count how many times I’ve resent paperwork and fax confirmations to servicers to stop them from wrongfully applying interest or charging fees or changing repayment plans.

It’s just smart to keep records.

Who Can Help Get You of Student Loan Default?

As you know, you can handle getting your student loans out of default yourself.

You don’t need to hire a student loan lawyer like me.

Once you know who has your defaulted loans, the process for getting out of default should be straight-forward.

I say should because sometimes working with the collection agencies can be really difficult.

They can be hard to get in contact with. They could demand a payment you simply can’t afford. Or they could even have you send the same paperwork to them 2, 3, 5 times.

The worse though is when you were making payments believing you were enrolled in a rehabilitation program. Only to find out after the 9th payment that none of those payments counted because you weren’t fully enrolled in the program.

These issues are real.

This is why I tell people the real reason you hire someone for student loan default help is to make sure you don’t get screwed over when you’re trying to do the right thing.

If you know you can do that on your own, great.

But if you’d like some help, let’s talk.

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