What Happens If I Default on My Student Loan?
Learn the answer — and avoid defaulting on your loan by following a few simple steps
Student loans help pay for the expenses of a college education. Of course, you need to repay those loans even if you don’t graduate. Fortunately, federal government student loans have what’s known as a grace period — a set time after you graduate, leave school or drop below full-time student status before the loan repayment begins. The grace period gives you time to find a job or deal with a difficult life issue before you have to pay back the money.
If you can’t, or choose not to, pay back the loan, you risk going into default. To default on a loan means you did not pay it back on schedule according to the terms of the promissory note, the legal document you signed when you got the loan.
You don’t have to panic if you miss one payment. Going into default won’t happen right away. If you miss a few payments, your student loan will first be tagged with a delinquent status. It won’t officially go into default until 270 days have passed without a payment.
At that point, you will face some serious consequences. The U.S. Department of Education’s Federal Student Aid office lists these possible actions that may be taken if you default on your student loan:
- Your entire loan, including interest, is due and payable immediately
- You will lose the chance to alter your payment plan, receive a deferment (a postponement of payment on the loan) or be granted a forbearance (a suspension or reduction of payment due to hardship)
- Opportunities for additional student aid will be lost
- Your account will be turned over to a collection agency
- Your credit score will be damaged
- You’ll end up paying more than the original loan amount as you accrue late fees, interest, and other costs associated with the collection process
- On federal student loans, the government may request your wages be garnished by your employer and sent to pay off the loan
- You may face legal action from the loan holder
Needless to say, you want to avoid all that. To do so you’ll have to take steps in advance to keep from defaulting.
How to avoid defaulting on a student loan
Be proactive if you sense trouble is coming or if you experience a change that may affect your ability to pay back the loan. (Also let the lender know when you’ve had a change of address, have graduated, dropped out of or transferred to another school.) If you can’t make the monthly payments, ask your loan provider about applying for a deferment or forbearance. They will help you understand what these mean and what other options are available.
In case you are thinking about simply declaring bankruptcy, forget it. According to the Federal Trade Commission, your student loan obligations usually cannot be erased through personal bankruptcy proceedings.
It’s plain and simple: In order to avoid default you have to make arrangements with your service provider to pay back the loan. Otherwise you’ll be in default, and that is a place you don’t want to be.
Before you take out a student loan
The best way to avoid defaulting is to manage your debt level. Don’t borrow money if you don’t have to. And borrow as little as you can. The more you borrow, the more you have to pay back.
Instead, save for college and pay for as much as you can with cash. Anticipate what you’ll need for college by creating a budget. Then borrow only what you absolutely need and can afford to pay back.
If you decide to take out a loan, make sure you understand the agreement. Know the costs of getting into the loan, the interest rate on the loan and the terms of repayment. Do not sign the promissory note that grants you the loan until you fully understand the details.
Once the loan is secured stay organized and keep accurate records. Create a file that includes:
- All the loan documents, including promissory notes, account numbers, contact information and counseling materials
- The amounts you borrowed, the payment schedule and what you’ve already paid
- Documentation (include names and dates) of conversations you’ve had with loan officers