Student loan debt is one of the biggest issues facing our country, as college graduates pay a heavy and ever-increasing price to walk the stage and receive a diploma. Because so many young Americans finish either their undergraduate or graduate studies with so much owed, it can be hard to keep up with these and other financial obligations.

worried student

Too often, young adults find themselves about to default on their student loans. Short of dropping everything and leaving the country, how can you effectively deal with your student loan default? We’ve got all the answers you need.

What exactly is student loan default?

Default happens when you haven’t made payments on your loan over a certain period of time. But before your account goes into default, there are a few other noteworthy milestones that should serve as warning signs.

First, your loan becomes delinquent as soon as you are late making a payment. But since most lenders offer a grace period before assessing any late fees, this date probably comes and goes quietly.

Still, it’s important to keep track of what you owe and make every effort to get that bill caught up. Once the grace period is over, your lender will likely charge a late fee. The amount of time it takes for this to happen and the exact cost varies from lender to lender.

At 90 days late, your account hits another major milestone: it’s reported to the three credit bureaus and listed on your credit report as a late payment. Your credit score will automatically drop, and unfortunately, the higher your score was to begin with, the greater dip you’ll see. It takes seven years for a late payment to be removed from your credit report, so this alone is a significant side effect.

Once time passes and you haven’t made any payments for 270 days since the initial missed due date, your student loan account will officially go into default. Your lender will send the debt to a collection agency, and you’ll start to hear from them about repaying what you owe. Not only that, any collection fees they assess will be added on top of the amount you already owe in principal and interest.

What are the repercussions of going into default on your student loans?

A lot can happen once your student loan goes into default. Some consequences are inconvenient, while others are quite serious and long-lasting. We mentioned a 90-day late payment affecting your credit score. It probably lowered even more when your account became 120 days and 150 days late.

Once in default, it will be listed as another negative item staying on your credit report for seven years, which lenders and creditors can see anytime you go to apply for credit during that period. You may have trouble getting approved for loans and credit cards. Even if you are approved, you’ll probably be offered lower amounts and higher interest rates, making access to credit extremely expensive.

If you have federal loans, going into default also causes you to lose several existing privileges. These include eligibility for loan forgiveness programs, income-based repayment plans, forbearance, and deferment. All of these can be helpful tools when facing financial difficulty, so it’s an unfortunate side effect to lose your federal loan benefits.

Even more serious is that defaulted student loans can be collected in extremely aggressive ways, even beyond the initial collection agency. You could potentially have your tax refund garnished to go towards offsetting your student loan debt. If implemented, it happens automatically so that you don’t have a chance to access any of those tax returns.

The government can also begin to garnish your wages to begin collecting on your student loans. In fact, they can take out as much as 15% of your paycheck, which will certainly have a big impact on your monthly budget.

The federal government can also open a civil lawsuit against you anytime after your loan has gone into default. While relatively uncommon, it’s still a possibility that must be taken seriously.

Are there steps you can take to prevent defaulting on student loans?

Yes, and it’s best to address any financial issues well before they develop into a full-blown loan default. Your options depend on the type of loan you have.

Private Loans

For private loans that weren’t granted by the U.S. Department of Education, you should contact your lender or collection agency directly to explore what paths you can take. You may be able to refinance your loan to get a lower interest rate if you qualify, but you’ll need good credit for this plan to work.

Regardless of your credit, you could refinance to extend your repayment term. This may require you to pay more interest in the long run, but could effectively decrease your monthly payment amounts so you can keep up with the loan. And don’t be afraid to shop around for lenders when you refinance.

You’re not required to stick with your current lender and you may find one better suited to your credit profile. Just make sure any offer you receive is based on a soft credit inquiry rather than a hard one; otherwise, you run the risk of damaging your credit even more.

Federal Loans

When you’re on the verge of defaulting on your federal student loans, your options primarily depend on the type of loan you have. You may qualify for any number of repayment plans, such as:

  • A graduated repayment plan — your payment amount starts off lower and increases approximately every two years
  • An extended repayment plan — you can lengthen your payment term to up to 25 years
  • A pay as you earn plan — your payment equals 10% of your monthly discretionary income
  • Income-based repayment plan — your payment equals 10-15% of your monthly discretionary income
  • Income-contingent repayment plan — your monthly payment is the lower amount of either 20% of your discretionary income or the amount you would pay on a 12-year plan based on your income
  • Income sensitive repayment plan — your monthly bill is based on your annual income

Each plan comes with different types of qualifications, so check out the Federal Student Aid website for the exact details.

What if you’ve already defaulted on your loans?

Whether you have a private lender or a federal loan serviced by a third party, it’s important to reach out to them no matter how far into default you are. You can explain your financial situation and let them know that you’re ready and willing to do what it takes to get your account back on track. They should still be able to offer you some options to help you make your payments.

You may, for example, qualify for an income-based repayment plan so that you can lower your payments to a certain percentage of your monthly paycheck. If it makes financial sense, you might also qualify for debt consolidation, which ideally pays off your student debt with a lower interest rate loan.

You can also get your loan out of default by paying in full, although this option may not be financially viable if you’re already having trouble with your monthly bills.

With federal loans, you might be able to enroll in a rehabilitation program. After making nine consecutive monthly payments on time, your loan can be taken out of default and fully restored to a normal status.

You also become eligible for federal loan perks like forbearance, repayment plans, and loan forgiveness. Plus, you could qualify for additional student aid if you plan on going back to school. The downside, however, is that you can only rehabilitate a loan once, so it’s important to have a plan going forward.

Your previous late payments will still be listed on your credit report, causing your credit score to remain low. Finally, you may be charged expensive collection costs as part of rehabilitating your loan.

Defaulting on your student loans is serious business and it’s best to avoid it at all costs. As soon as you get into a financially difficult spot, explore your options and choose a path to move forward. The most dangerous thing you can do is ignore the problem, because it just makes the situation worse.

You can avoid a lot of potential financial damage by addressing the issue early on. But even if you’re already in default on your loans, it’s comforting to know that there are ways to get out of it. Find the best choice for you so you can begin to move on and get your credit and finances back in order.

Can my defaulted student loans be cancelled or discharged?

According to the Higher Education Act, loans can only be canceled if you die or become “totally and permanently disabled after the loan is disbursed.”

Loans can also be discharged, outside of bankruptcy proceedings, if your school improperly certified the training it offered, closed while you were in attendance, or closed within 90 days after you withdrew. These are fairly rare situations though, so let’s take a look at happens more frequently.

If you are looking to declare bankruptcy as a solution, it can sometimes offer the relief you need. However, discharging student loans under Chapter 7 is unlikely in most cases because student loans are specifically excluded from discharge in the bankruptcy code.

The non-discharge-ability requirements for educational loans are for both student borrowers and parent borrowers, and they also apply to consolidation plans. But getting around this law requires petitioning for “undue hardship,” which is only granted in extremely special circumstances.

You typically must prove to the court that you are unable to pay now and have no chance of being able to pay the loan in the future. However, you shouldn’t rely on any type of bankruptcy to get out of your student loans because it is very difficult to do. Then you’ll still end up owing your student loans just as you did before filing for Chapter 7 bankruptcy.

Under Chapter 13, you have the chance to at least get a break from high student loan payments. This type of bankruptcy has a higher income threshold compared to Chapter 7 and entails signing up for a repayment plan for a predetermined period of time. Your monthly repayment amount is based on your income and expenses and is divvied up amongst your creditors.

In this situation, student loans are considered nonpriority unsecured debts, similar to credit card and medical debt. While this won’t cancel out your student debt, it can help lower your monthly payment obligation during the bankruptcy period. Just note that interest continues to accrue at its typical rate and you’ll have to continue your regular payments once your bankruptcy period is over.

Who can I talk to for more information?

The U.S. Department of Education has a toll free customer service line with agents who can provide more information about both federal loan repayment and loan discharge-ability: 1-800-621-3115.

If you have private student loans, call your lender directly to discuss your options to avoid default. If you’re struggling with various types of financial debt, consider contacting a local bankruptcy lawyer to help you find the best path for your financial situation.