Student loan debt is a heavy burden to bear. About 70% of students in public and nonprofit school graduate with student loan debt and the average level of debt nationally is about $30,000. California students in public and non-profit schools are actually in a better position than most of the rest of the nation – Cali grads have an average of about $20,000 of outstanding student loan debt, which is one of the lowest levels in the country. Note that these figures do not include private school students; very few private schools report their students’ debt levels. Experts estimate that private school grads end up with more than 40% more debt than their public and nonprofit counterparts.
About 1/5 of student loans are private, so what happens after a default depends on the terms of the loan. The other 80% of student loans are funded by the federal government, which means there is a specific process that is set in motion when you default.
Defaulting On Your Loans
First, let’s talk about what it means to default on a loan. “Default” is a technical legal term. To be in default means you’ve broken the terms of the loan. It usually means you’ve gone a certain amount of time without making a payment.
The day you miss a payment, your loan is considered to be “delinquent.” In other words, it’s not in good standing. Until you catch up on all your payments, your loan will stay delinquent. It’s not going to be an issue if you forgot and ended up paying a week late, but there are consequences for letting your loan stay delinquent for 90 days. At 90 days, your lender will report the delinquency to the credit rating agencies and it’s going to affect your credit score. That can make it hard for you to rent an apartment, buy a cell phone plan, set up your utilities, get insurance, and more.
If your loan stays delinquent for long enough, you’re considered to be in default. If your loan requires monthly payments, you’re in default after 9 months. If you have a FEEL loan and pay less than once a month, you’re in default after 11 months of nonpayment. Remember that a partial payment doesn’t count as a payment for default purposes, so the clock starts as soon as you fall behind and continues even if you make partial payments. To stop the clock, you need to catch up on all your back payments.
The Default Process
If you default on a regular, non-student loan, you’ll typically start receiving letters from your bank about repayment. They’ll report it to the credit agencies, but they usually can’t do anything to collect without filing a collection lawsuit against you. Typically, they’ll sell the loan to a collection agency instead and let them deal with the hassle. If they file a lawsuit and win, then they can ask the court to garnish your wages, levy your bank accounts, and use other methods to collect the debt.
Federal student loans have similar collection options, but with one big difference: the government doesn’t have to file a lawsuit in order to collect. For student loan repayment, the feds can take up to 15% of your disposable income (your wages after taxes and Social Security). They can also withhold your tax refund and federal benefits. There are some limits – they can’t take more than 15% of your federal benefits and they can’t leave you with less than $750 per month, or $9,000 per year in benefits. Note that some of these collection actions can be challenged in court, but you’re going to need an experienced (and potentially expensive) attorney to help you.
Other Default Consequences
Defaulting on your loan isn’t just a threat to your wages and tax refund. It can also cause you a lot of other problems. The default will be reported to the credit bureaus and will damage your credit score. You’ll lose your eligibility for other student aid and you’ll no longer be able to enroll in deference, forbearance, or repayment plans. That can make getting your loan back on track really tricky.
In addition to damaging your credit score, defaulting on your loan just puts you deeper in debt. When you go into default, your loan accrues late fees and interest, meaning the debt is growing all the time.
Finally, defaulting on a student loan can affect other people. If you’re married and file a joint tax return, your spouse’s portion of your federal tax refund may be intercepted to pay the debt. In addition, anyone who co-signed or guaranteed your student loans is on the hook for repayment and may face the same kinds of collection efforts as you, like wage garnishment, tax refund interception, withholding of benefits.
Behind On Your Loans?
If you’re struggling to keep up with your student loan payments, doing nothing is the worst possible option. Federal student loans mean automatic collection efforts if you go into default and private lenders can pursue collection through a collection agency or filing a lawsuit themselves. In addition, it’s nearly impossible to get out of a student loan in bankruptcy. It happens, but it’s incredibly rare and can only happen in very specific circumstances. That means there’s no getting rid of student loan debt. You have to pay it off or, if they are federal loans, enter into one of several repayment options.
The good news is that there are a number of ways to make repayment of your student loan debt easier. The first step is to reach out to your lender. If you’re going to miss a payment or can only make a partial payment, contact your lender right away. Don’t wait until you’re nearing default – the sooner you act, the more options you have. Your lender may be willing to work out a personalized repayment plan with you and may even allow you to skip a month’s payment to get back on your feet. The lender doesn’t make any money if you don’t pay off your loan, so they’re often willing to work with you to make payment easier.
In addition, federal student loan borrowers can participate in a number of repayment programs. Some link your repayment to your income, so your payments are based on how much you earn. Others allow you to start with very low payments and slowly increase the payments over time as you progress in your career. There are more than half a dozen repayment plans available. If you can’t make a payment because of short-term extenuating circumstances (like an illness or a natural disaster), your lender may give you a deferment or a forbearance. A deferment means your payments can be postponed without accruing interest or late fees. A forbearance means your payments are reduced or stopped altogether for a period of time without penalty. Finally, you may be able to consolidate your loan and reduce your monthly payments.
The Bottom Line
Default is no joke. It has serious consequence and can cause you serious pain down the line. There are plenty of ways to make repayment easier and to get a break from your lender, so don’t let your loan go into default. Start working with your lender as soon as you can to get your payments back on track.