Student loan borrowers accumulate debt with the hope that they will get a degree and find a better job in the future. However, most borrowers end up struggling with debt repayment due to unemployment, low income, or unexpected events like the pandemic. It is not surprising that currently, around 15% of borrowers are in default. Every year more than a million students default on their obligations.While the causes are understandable, defaulting brings many inconveniences for borrowers. Hence, debtors should take all necessary steps to avoid or get rid of the student loan default fast.
This guide explains the loan default process in detail and presents strategies to avoid its negative consequences. Yet, if you find it hard to deal with default status, you can contact our debt specialists.
The Nightmare: Defaulting
Student loan default does not happen immediately. If you keep missing your payments, you will first face a delinquency process. If you continue ignoring the notices, then your loan will default. Hence, you have plenty of time to take necessary actions so that you avoid the negative consequences.
While we explain the loan default process in detail and clarify the terms, you might still find the process challenging. For the best results, we advise you to get expert help. Third-party specialists, like those in Forget Student Loan, can analyze your finances and determine the best solution for your debt challenges.
What is Delinquency?
We have mentioned that the delinquency process happens before default. So, what is delinquency?
When you get a loan, you agree to make monthly payments. Every month, you receive a bill that indicates how much you owe and when your deadline is. If you miss your payment, your loan becomes delinquent. In other words, loan delinquency is the state of non-repayment. This status stays till you make the payment. So, if you want to avoid delinquency status, it is enough to pay your obligation.
However, you might also face financial challenges. In this case, making the payment is hardly possible. Therefore, an alternative solution can be requesting loan forbearance status. Loan forbearance allows borrowers to stop repayment for a few months, but your interest payments might accrue. Besides, you can enroll in a different repayment plan. Income-driven repayment plans are known for their affordability. Hence, it is a great option if you face financial struggles.
But what happens if you do not find a solution for delinquency? In this case, if 90 days pass after the due date, the loan servicing company will contact the leading credit agencies. As a result, your credit score will fall. Keep in mind that borrowers with bad credit performance usually qualify for high-interest rates. It will be hard to get new loans, credit lines, or even insurance.
What is the Student Loan Default?
So, 90 days passed from your due date, and your credit score fell. Now, the student loan default will follow the delinquencies. Generally, there exist different time limits for default depending on the loan type. For example, if you have Direct or FFEL loans, you will face default 270 days after the due date. However, Perkins loan borrowers will default once they miss the due date. So, the conditions for Perkins loan borrowers are more challenging.
If you ignored delinquency and now defaulted, you need to act fast. Once you get notified about default, you need to contact your loan servicer. When borrowers explain the situation to the servicer, they get guidance. Sometimes, they are enrolled in new repayment plans. Therefore, if you act quickly, you can avoid the negative consequences of student loan default.
Consequences of Default
Till now, we recommended you avoid student loan default not to face its negative consequences. But what are the negative results of default? Unfortunately, default is in no way desirable. It impacts the borrowers’ ability to get new funding options and decreases credit scores. Individuals with bad credit face all kinds of challenges. They find it hard to find an apartment to rent, qualify for new loans, get insurance, or even be employed due to low credibility.
Yet, there still exist more drawbacks. If you default, your whole outstanding debt balance becomes immediately payable. It means you need to pay the entire amount to get rid of the default. You cannot apply for forbearance or loan deferment to stop default. Additionally, you cannot qualify for federal benefits and other repayment plans.
In case of default, the school can withhold the transcript. In other words, they can demand you to pay the obligation to give you the transcript. Unfortunately, the Education Department or the loan servicing companies cannot support you to get the transcript. Therefore, providing a transcript is at the sole discretion of the school.
Even worse, the loan servicers can collect their payments through involuntary methods. It means, although you do not want to make payments, the servicers receive money from your employers or the Treasury Office. In other words, your wages might be garnished, in which case the employer will take part of your income and pay directly to the loan servicer. Alternatively, in the case of Treasury offset, your tax refunds or other federal benefit payments might be stopped to pay for the loan.
Unfortunately, the lenders can also sue you because you breach the loan agreement when you do not repay debt. Such conditions can make the situation even worse, as you might be responsible for court and attorney fees.
If you notice that your loan is transferred to a collection agency, you need to start worrying. These agencies incur costs for loan collection. Hence, borrowers become responsible for these costs. Usually, the collection costs can be around 18% of your debt balance. This amount is paid in addition to your original debt balance and interest payments. Yet, each agency has its terms for costs.
If your loan is transferred, the collection agency will contact you and request a voluntary repayment. In case you deny payment, the collection agency will collect money through wage garnishment or Treasury offset. We will discuss these options in detail in the following sections.
Sometimes borrowers do not work, and there is no way to collect the payments. Therefore, the collection agencies have a right to sue the borrower in student loan default. Yet, keep in mind that they cannot go beyond legal action. For example, they cannot physically abuse or pressure you to make payment.
One way of collecting repayment in case of student loan default is through wage garnishment. This process requires 15% of the debtor’s wages. It means the employer will take 15% of your disposable income to pay for your loan. Keep in mind that disposable income is what is left after deducting taxes and other social security fees. Your wage will be garnished till the whole debt is paid, or you get rid of the default status, which we will explain how to.
The Process and Your Rights
Even if you failed to meet your obligations, you still have different rights in the case of wage garnishment. In case of a student loan default, you will be informed 30 days prior about the wage garnishment process. Then, you will receive a notice where you can find the outstanding debt amount and your right to voluntary repayment.
The borrowers have a right to object to the wage garnishment process. There can be different grounds for the rejection. For example, you might argue that your debt amount is stated falsely or default is mistakenly provided. Next, you can say that you might face extreme financial challenges if you lose 15% of your disposable income. Finally, you can request a hearing to suspend the wage garnishment process.
You might worry that you might lose your job if your employer becomes aware of the student loan default. However, keep in mind that the employer does not have a right to discriminate against you for defaulting on student debt.
How to Avoid Wage Garnishment?
You can avoid wage garnishment in several ways. First, voluntary payment can stop wage garnishment. However, you need to make the first voluntary payment within 30 days after receiving the garnishment. Then, if you do not have money to make payment, you can request a hearing. Again, you need to request a hearing within 30 days. Some people wait to receive documents to request the hearing. Yet, you do not need to wait because 30 days have already started, even if documents are not provided.
Keep in mind that you will bear the costs of the hearing. You need to prove your arguments for the objection of wage garnishment. In case of a student loan default, if your hearing is successful, the garnishment will stop for a year. It usually takes around 60 days for the final decision. Hearing can happen face-to-face, on the phone, or solely based on the records. If your request is unsuccessful, the wage garnishment can be unavoidable.
Another consequence of student loan default is Treasury offset. Your loan payments can be collected by taking your tax refunds or other federal benefits. In case of default, the Education Department can ask the Treasury Department to hold your tax refund and other benefits for the loan payment.
You will be informed about the Treasury offset around 65 days prior. You will receive your notice to your last known address. Offset continues till the debt is paid or default status is eliminated. Besides, you have a right to request a hearing to object to the offset decision. As explained before, if a hearing is successful, you will avoid offset.
How to Avoid Loan Default?
Sure, resolving default status is necessary. However, it is a better strategy to avoid default in the first place. Then, when you receive a notice of delinquency, you can act fast and avoid facing default. It is advisable to contact your loan servicer and get help immediately.
Besides, it is recommended to be conscious of student loan default. From the time of receiving the loan, you need to think one step ahead. You should check your expenses and decide how much to get. Please, avoid requesting more money than you need. Keep in mind that you will return debt together with its interest. Moreover, you should pay the debt even if you do not graduate. Hence, try to minimize the total amount of debt when you get the loan.
When you receive a loan, you can check the repayment process on an online platform offered by the Education Department. You can check your payments, faulty details, etc. Besides, keep all your documents so that if mistakes occur, you can prove your arguments.
Another effective solution is keeping regular communication with the loan servicers. If you face any financial challenges, contact the servicer immediately to solve student loan default. The loan servicer can change your repayment plan, grant forbearance, etc., to help you avoid the default.
If you have multiple loans, and it is hard to keep track of payments, you can consolidate your debt. Student loan consolidation allows combining different loans into one. As a result, you deal with one loan repayment rate as the weighted average of your existing loans.
How to Resolve Default?
If student loan default is unavoidable, you need to find new strategies to resolve the default. Otherwise, you will face negative consequences, which we discussed in this guide.
Luckily, even if you default, there still exist strategies to eliminate the default status. Two of the most effective solutions are debt rehabilitation and consolidation.
As mentioned before, your whole debt amount will be immediately payable once you default. Hence, you can pay the entire amount and avoid the undesirable default impact. However, it is understandable that financially struggling borrowers might not have the lump-sum amount to pay off the debt. Hence, debt rehabilitation and consolidation seem like more effective solutions.
What is Loan Rehabilitation?
Loan rehabilitation requires voluntary payments. If you have FFEL or Direct loans, you need to make nine payments within ten months. All payments should be within 20 days of the due date. The rate you will pay is calculated as 15% of monthly discretionary income.
Possibly, even 15% can be prohibitive for you. In this case, you can contact the loan servicer to change the amount. Even if you pay this amount, involuntary collection methods like a wage garnishment or Treasury offset can continue. Once a nine-month worth payment is made, the student loan default status is removed. Although default will not appear in your credit history, the late payments will remain there.
What is Debt Consolidation?
Another solution to a student loan default is debt consolidation. Loan consolidation allows borrowers to simplify the repayment process by combining multiple loans into one. For example, you can consolidate your defaulted loans if you agree to enroll in an Income-driven repayment plan and make only three voluntary payments. Again, the payments should be consecutive, in total amount, and made on time.
Unfortunately, every year, more than a million student loan borrowers default. During these challenging times due to the pandemic, the student loan default gains more importance. This guide explained the default status and suggested different solutions to avoid or eliminate it.
Yet, if you find the terms challenging and cannot decide which solution is the most effective, you can contact our debt specialists. In addition, we provide a free assessment opportunity to borrowers so that you can easily discuss your debt struggles with the experts. So, contact us now to avoid the negative consequences of default as soon as possible.