Serious Business: Defaulting On A Student Loan

Defaulting on a student loan is nothing to laugh at. In fact it is serious business with serious consequences. However, there are ways to prevent defaulting on a student loan so you never have to deal with this dire problem.

So let’s dive right in with some definitions first and then let’s discuss how you can avoid this nasty problem altogether. After all, a student loan is supposed to help your credit, not put a serious demerit on your credit score!

What Does It Mean to Default On Your Loan?

When a student loan has gone into default, it means that the borrower has failed to make payments on time. Now, this does not just mean missing one payment or two. While it is damaging to your credit score, if you make up these payments and pay the penalties then resume normal paying habits, you should be fine.

Defaulting on your loan means that you have failed to make payments for 270 days consecutively. Basically, it means you have ignored your loan bills, consciously did not pay them and now have serious marks on your credit because of it.

Why Do People Default On Their Loans?

I don’t know that anyone willingly defaults on their loans. Rather, misinformation and a lack of funds often contribute to it. A lot of the time, people think if you dropped out of school, failed to complete your studies, couldn’t get a job right away after graduation or weren’t making enough money that you have an excuse to not pay back your loan. However, this couldn’t be farther from the truth.

In fact, it does not matter what you have decided to do education-wise or if you found a well enough paying job. The fact of the matter is that you committed to start making loan payments at a certain time as specified in your loan agreement. You signed your name on that agreement, and unless you have a cosigner, the payments are entirely your responsibility. That is not to say you should rely on a cosigner to make payments for you. That’s a good way to make a close friend or relative very mad, very fast!

Now, there are special arrangements that can be made in order to prevent this whole, going into default business, but many students fail to educate themselves on the processes and procedures to follow.

How to Prevent Defaulting On Your Loan

There are many ways you can prevent defaulting on your student loan, though it requires planning ahead. However, even if you find yourself in a financial pinch later on, you can still utilize these tips for preventing default altogether.

Never Sign Anything You Don’t Understand

It’s one thing to agree to user agreements online without having read every last word of the “Terms and Conditions.” However, it is in your best interest to read every last word on your loan agreement. In it, you will find out what you are expected to do, what your options are and what their stance is on failing to make payments. Find out if there are penalties, and if you don’t see anything listed about deferments or income-sensitive repayment plans, ask! Even though you can’t even imagine not being able to pay your loans right now, it can happen even to the best savers and the hardest workers.

Keep Your Lender In The Know

Whenever anything changes about your life that may affect your loan, make sure you notify your lender right away. For instance, if you’re moving, let them know your new address. Or, if you have graduated college. Likewise, let your lender know if you have dropped out of school or plan on transferring to a different school. It is just vitally important to let your lender know anything and everything that may affect your ability to repay your loan. I mean, it would be really unfortunate if you went into default because you didn’t receive your bill!

Consider Deferment

One way to avoid default is to apply for student loan deferment. This helps to postpone your loan payments until you can afford to do so once again. However, you will need to plan ahead a bit here. While you are still making payments, ask about deferment. I know it can be hard to foresee circumstances that could prevent you from making timely payments, but as soon as you know something will interfere, let your lender know. That way, they can do their best to help you come up with an alternative repayment plan.

Make Special Arrangements, If You Can

If deferment is not an option, or you can afford to make payments just not in the same amount as before, talk to your lender about different repayment options such as income contingent repayment or income sensitive repayment. These options make repaying your loans much easier, especially during a time of financial struggle. Again, so many people go into default because they didn’t know they had any other option. However, if you knew you could lower your monthly payments, then wouldn’t you do it to avoid default?

Consolidate Student Loans

Another excellent way to avoid going into default is to consolidate student loans. If you have taken out more than one loan over the course of your college career, you may be faced with many bills that are all due at around the same time each month. By consolidating your loans, you make it so you only have one loan payment each month and you even may be able to extend the life of the loan so you can make even smaller monthly payments. This is by far one of the best ways to beat defaulting if your payments were just too high before.

Consequences of Defaulting On Your Loan

You already know that defaulting on a loan is bad, but do you know how bad? Just look at some of the consequences.

  • A collection agency will take over your loans
  • You could be sued
  • A percentage of your income may be taken to pay your loans.
  • Social Security benefits could be withheld.
  • Future federal loans are out of the question.
  • Deferments are no longer an option
  • It could prevent you from getting credit cards, auto loans a mortgage or even a job.

And those are just some of the consequences associated with defaulting on a student loan. I told you it was serious business, didn’t I? Besides, the experience of having a student loan should be a positive one. You get to pay back your debt, build your credit and make your first venture out into responsible adulthood. Going into default is not the way to do this. In fact, it may very well set you back for years because of it. Don’t let limited funds ruin your credit. There are alternatives to default, some of which might even improve your credit!