In addition to some people opting to walk away from their mortgages, the temptation to default on student loans is growing. Unfortunately, defaulting on student loans can have even worse consequences than defaulting on a mortgage. So, let’s go over what will happen if you default, and options for avoiding default.

What Qualifies as Default?
The government gives you many chances to keep up on your student loans. You only enter default if you fail to make any payments or repayment arrangements for 9-12 months.

What Happens If You Default?
Unlike some types of debt that will eventually become stale if you just ignore them, federally-subsidized student loans will follow you for the rest of your life. As long as you’re in default, you will not be able to qualify for a mortgage or any other type of loan, including future student loans. You may be turned down for jobs because it will appear on your credit report. The government or your lender also has the option of garnishing your wages or tax refunds in order to be repaid.

Can You Negotiate a Lower Payment When It Goes to Collection?
Student loans are not like any other kind of debt. Once it enters collection, the costs only increase. You will not be able to negotiate a lower pay-off balance. In fact, you will be responsible for all of the collection costs as well as penalties. Depending on the type of loan, you will owe an additional 25%-40% of the balance. The financial aid website explains more about the collection costs.

Can Student Loans Be Discharged in Bankruptcy?
In very, very, very, very rare cases, you can have your student loans discharged in bankruptcy court. Unfortunately, you have to prove that there is no way you can ever repay your debt, which typically requires that you be severely disabled.

Can You Apply for Loan Forgiveness?
Direct federal loans may be forgiven after 10 years of public service. Only certain jobs qualify and you have to make 120 payments after 1997 to qualify, but if you’re interested in that route, visit FinAid to learn more.

Are There Alternatives to Defaulting on Student Loans?
Fortunately, your lender has many options to avoid defaulting on your loans. Your first option is deferral. Your loan can be deferred for a specific period of time. If you’re returning to school, some loans won’t accrue interest while you’re in school. Other loans will accrue interest, but you won’t be required to make payments. Members of the military on active duty are eligible for special deferrals. Financial hardship deferrals are also available. If your situation is so severe that a deferral isn’t sufficient, lenders also offer forbearances. Interest accrues during a forbearance and you are responsible for paying it, but you won‘t be responsible for the full payment amount until the end of the forbearance. Some types of forbearance simply reduce your payments while others suspend them. Your lender will review your finances to determine the most appropriate option for you.

If you’re at risk for default, the first thing you need to do is contact the lender or consolidator who currently holds your loans to discuss your options. They will help you apply for a deferral, a forbearance, or a new repayment plan. Don’t risk your financial future by defaulting on your student loans – it will only make things worse.

Comments

4 Responses to “What Happens if You Default on Student Loans”

  1. Selena on February 8th, 2010 1:24 pm

    There is a new type of loan repayment plan called Income Based Repayment (IBR). You can have your student loan payments lowered based upon your income. Depending on the number of people in your household and the income, some people may not have to pay anything. I actually got my reduced by $100 using this new repayment plan.

  2. Aryn on February 8th, 2010 3:32 pm

    Thanks for the info, Selena, that’s another great option for people struggling to pay their loans.

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