As the U.S. Student Loan Debt reaches upwards of $1.6 Trillion and more people are struggling to pay off multiple loans, defaults on student loans is increasing. The Brookings Institute reports that current trends suggest that nearly 40 percent of student loan borrowers could default by 2023. This is a staggering figure.
What does defaulting on a mortgage mean?
A default is a result of a prolonged period without making student loan payments. Delinquency occurs when you do not pay your loan. If you don't pay in 90 days your loan provider will report this to the national credit bureaus. You may see your credit score drop. If you continue to make late payments, your credit score may drop.
The length of time that it takes before a debt goes into default is dependent on the type and lender of your loan. After nine months, the federal family education loan (FEEL) program or direct federal loans will default. Perkins Loans are managed by the school. If you fail to pay, your debt may be declared default. Private loans can default in about three months. But this varies from lender-to-lender. If you are worried that you might miss a loan payment, review the delinquency or default policies.
Defaulting on a credit card will also negatively affect your scores. The default will usually remain on your reports for seven-years. You may find it harder to get credit for other things, like auto, personal or credit cards.
What should you do when you are in default? You can use several strategies to bring your student loans back into good standing and prevent you from going into default again.
First strategy: Loan rehabilitation
It is common to use loan rehabilitation in order to bring your federal student loans back into compliance. It is also the best option for many borrowers to avoid a negative impact on their credit score. If you want to repair a debt, you need to write down your agreement that nine affordable payments will be made each month. The loan provider will calculate a reasonable amount of payment by dividing 15 percent by 12 and then multiplying that number by your annual discretionary earnings. According to your income, the payment you make could be as small as $5 a month. If you pay all nine of your payments within a 10 month period, the default is removed from your history. The history still shows any late payments reported prior to the default.
The option of loan rehabilitation is great, but you only have one chance to do it. If you're worried you won't be able make the monthly payments you were used to after your loan goes into default, you might want to change your payment plan. The U.S. Department of Education offers a list of all the federal repayment options.
Loan consolidation is the second strategy
Loan consolidation is a way to consolidate federal loans. Once the loans have been combined, they are treated as paid off. The borrower then only has to pay the new consolidation loan. The outstanding interest on your loans will be added to the principal of your new loan and interest will start accruing.
To consolidate a defaulted credit card, you can choose between two payment options. You can either accept a repayment plan that takes into account your income or make 3 consecutive payments of the defaulted credit card on time. Consolidation gives borrowers a chance to make monthly payments that are more affordable. However, this also means that the borrower pays more interest throughout the loan's life.
Consolidation tends to be a quicker method than rehabilitation. This can make it a great option for people who are in default and want to get back into school. Once the loan has been combined, you will have the option to defer, forbearance, or forgive your loan. This is similar to loan rehabilitation. Loan consolidation does not erase the default on your credit report.
Repayment in full is the third strategy
You can also repay the loan in its entirety.
This method may be effective but is often not accessible to the majority of borrowers.
What about private loan?
Private loans do not have a standard method of getting out. Loan refinancing is a similar but not identical option to consolidation. This involves getting a loan with a lower rate of interest and paying off your existing debts. The default will be paid in full. The new amount, which may be higher than the original loan, will remain your responsibility.
Speak with your lender to find out what you can do if there is a default. You may be able negotiate a repayment plan that is similar to federal programs or they may offer a similar recovery program. Consider hiring an attorney who is experienced in dealing with student loans to assist you.
How can i avoid being in default again?
You will never want to be in default again. A repayment plan that is income-driven can help you avoid default. It's easier to pay and adjusted to suit your income. If you're worried about not being able to make payments, you may want to consider deferment and forbearance. Making consistent monthly student loan payments will help to repair your credit over time, even though defaulted debts initially harm your credit.