How to Get Out of Default | Stop Garnishment | 2-9 Months | Consequences | Second Default | Recover | Stay Out of Default | Get Help | Federal vs Private | Definition | Prevent Default | Find Defaulted Loans | What Happens | Consolidation + Rehabilitation
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.
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.
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.
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.