What Happens When You Default on Your Student Loan

Understanding Delinquency and Default

You do not default on your loan right away. It has different stages. When you miss the first payment on your loan, your loan is considered to be delinquent or a student loan default. The loan service provider may start charging you fees from this point on. But they do not report it to any credit bureau at this stage.

After 90 days of no payment, the three main credit bureaus are informed and this can hurt your credit score. This means it can get difficult for you to get credit cards, home loans, and other things on credit as a result of decreased credit score. After nine months or 270 days of no payments, your student loan enters the default stage.

In case of a loan under the Perkins Loan Program, the loan may be declared as default if you fail to make your loan repayment within the due date

Contact your loan service provider as soon as you expect you may miss a payment or even after missing one. Discuss possible options to avoid future consequences and default.

The Consequences of Student Loan Default

In addition to the credit score repercussions, there are other serious loan default consequences as well. Below are some of the consequences you can expect to face because of loan default:

  • You will not be able to get benefits like federal repayment plans, forgiveness, and deferment
  • Your wage can be garnished to repay the defaulted loan; this means that your employer will deduct a portion of your salary for repayment of the loan
  • You lose eligibility on any other federal aid programs
  • You can face difficulties in buying or selling real estate
  • Your school can withhold your academic transcript till the repayment of the defaulted loan 
  • Tax refunds may be withheld and applied to the repayment of the loan

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Default on Private Student Loans

Private student loans don’t have the benefits and protections as federal student loans. The 90-day or 270-day rules do not apply to these loans. Each loan provider sets different conditions and terms of the loans. Carefully read loan terms before signing them and refer to them to get an idea of default and delinquency.

Private student loan providers can sue for late payments and losing a lawsuit will result in further consequences.

For this reason, federal student loans are a much better option because of the benefits and protection involved. Therefore, private loans should only be considered as a last resort. You cannot apply for forgiveness or other federal reliefs but contact your provider to discuss potential solutions before letting things reach the default phase.

How to Avoid Student Loan Default

You can take several steps to ensure you do not risk defaulting on your loan. First and foremost, carefully read and understand all loan terms and conditions before signing. Keep track of your loan amount, interest, payments and identify any cash flow crunches you face in monthly payments. 

Do not hesitate to contact your loan provider in case you face difficulty in monthly payments, withdraw from school or face a situation that affects your ability to pay back the loan. You can use several options as well. You can apply for lower monthly payments or an income-based repayment plan, change due dates or get a forgiveness plan. In the case of private loans, you can get a repayment private plan to refinance the private loan.

Concluding Remarks

In light of the consequences mentioned, you must pay your loans in time. If you do fail to make a payment, contact your loan provider and discuss solutions before you default. Check if you qualify for any forgiveness plans. A default will affect your finances and benefits significantly.

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