Serious Business: Defaulting On A Student Loan
Most college students, regardless of grants or scholarships, will likely need to secure some kind of education loan. Higher education is expensive, and unless you have a sizable nest egg set aside to cover your college costs you will need to consider a student loan. But any loan is a serious undertaking, and failure to live up to your end of the bargain can lead to equally serious consequences. Defaulting on your student loan can lead to bad credit and an end to your college career.
Before you agree to any student loan, you should consider what it means to default on a loan, and what that can mean to your financial future.
What Does It Mean to Default On Your Loan?
When a student loan is designated as in default, it means that the borrower has failed to make any payments against that loan for 270 days. This does not mean simply missing one payment, or being late on a few payments. A default refers to a loan that has had no payments made against it what-so-ever for a period of 270 consecutive days. At this point, the primary lender must assume that the debt is being ignored, and that it is time to take legal action against the borrower.
Defaulting on a student loan is damaging to a student's credit history, and will prevent them from being eligible for any future loans until, and unless, the defaulted loan has been satisfactorily discharged. If a borrower resumes payments, and re-establishes a history of on time payment habits, a loan can be rescued from default and a students credit history can be cleared.
Why Do People Default On Their Loans?
No student willingly defaults on their college loans, and most borrowers are conscientious about staying up to date on their payment schedules. But financial circumstances can change, money can become tight and it's easy to get overwhelmed with an outstanding college debt. Admittedly some students ignore their loans in the hopes that they will simply disappear, but whether by accident or design a defaulted loan has serious consequences for any student. Remember, when you sign a loan agreement you have committed to making timely payments against that loan and you are responsible for that loan in totality.
Now, having said all that there are ways to avoid going into default. It is in your lender's best interest to work with you to help you stay on track with your loan payments. Special arrangements can be made to avoid a loan falling into default, and every student borrower should familiarize themselves with these procedures.
How to Prevent Defaulting On Your Loan
There are a number of successful ways to avoid going into default on your student loan, though they require a measure of planning and preparation. The following tips will help you avoid defaulting on your student loan. Should you find yourself facing a loan default, these methods can also help you escape final judgement and rescue your personal credit.
Never Sign Anything You Don't Understand
The first rule to follow when securing any type of loan, is to read every part of the loan agreement. In it you will find everything you need to know about your responsibilities as a borrower, and your lender's policies and penalties regarding late or missed payments. Be certain you understand the loan agreement in it's entirety, and if there are portions of the contract you find confusing do not hesitate to ask the lending officer to explain them more fully. Don't be shy about asking for clarification on any portion of your loan agreement, and be sure to inquire about possible deferments or income-sensitive repayment options. Entering into a loan contract is a serious business, and you need to understand all of the aspects, and possible stumbling blocks, associated with that loan.
Keep Your Lender In The Know
Whenever anything changes in your life or finances that may affect the status of your loan, be sure to notify the lending institution immediately. For example, if you are moving be sure to notify your lender of your change of address. Don't let your loan go into default simply because you have not been receiving your monthly statements. Likewise, if you are transferring schools or have decided to drop out of college altogether it is important to notify your lender as these changes will directly affect the repayment program associated with your loan.
Should you experience financial setbacks, do not hesitate to contact your lender directly to discuss the changes in your circumstances. Oftentimes borrowers will be embarrassed about speaking to their bank or loan provider about their financial difficulties, but your lender may be able to help you navigate a path through your financial difficulties that will enable you to avoid a loan default.
One way to avoid defaulting on your college loan, is to apply for a student loan deferment. A loan deferment allows you to postpone all, or a portion of, your payments for a predetermined period of time. Loan deferments require a bit of forward thinking, and if you see a financial stumbling block ahead you should contact your lender immediately to inquire about any deferment programs for which you may be eligible. Keep in mind, however, that a loan deferment merely postpones your payments. Your student loan will continue to accumulate interest, and you will still be responsible for all money due your lender.
Make Special Arrangements, If You Can
If you find that you are not eligible for a loan deferment, or if you can only afford to make timely payments in smaller monthly installments, you should talk to your lender about adjusting your payment options. Many lending institutions can shift your loan into an income contingent, or income sensitive, repayment plan. Lowering your monthly payments and helping you avoid default. Remember, it is in your lenders best interest to have you successfully pay of your student loan, and they will work with you to make that possible. Again, keep in mind that adjusting your repayment program will result in a longer life to your student loan, and you will be responsible for any additional interest that accrues on that loan.
Consolidate Student Loans
Many students find that they can avoid defaulting on their college loans by opting to consolidate their outstanding loans into one more manageable loan package. If you have more than one student loan, and are finding it difficult to maintain the repayment schedules, you may find that consolidating your student loans can help you reduce your number of monthly bills to a single more manageable payment. When consolidating your student loans you may also find it is possible to extend the life of your loan, thereby reducing your monthly payments even further. Loan consolidation is by far the most successful, and popular, method of avoiding a default.
Consequences of Defaulting On Your Loan
By now you realize how important it is to avoid defaulting on your student loans. But before we finish let's look at the consequences of defaulting on a loan.
- Your primary lender will turn your loan over to a collection agency
- You may be sued for the balance of your loan plus damages
- Your wages may be garnished to cover the outstanding loan debt
- Any Social Security benefits may be withheld.
- You are no longer eligible for any Federal loans programs
- Deferments will no longer an option
- You may be barred from securing a credit card, mortgage, or car loan
These are only some of the consequences associated with defaulting on a student loan. Securing a student loan is nearly always a necessity when preparing for college. Beyond the obvious benefits of paying for some or all of your tuition costs, it is also a way for young students to begin building the solid credit history they will need in later life. Don't let a loan default ruin your credit, and impede the progress of your education or your career. There are alternatives to loan default, and the smart student will take advantage of them before allowing their loan to become a detriment to their future financial life.