Is defaulting different from being delinquent on my payments?
Defaulting typically means you missed several payments within a certain time frame. Default timelines vary depending on the type of student loan. Federal student loans usually default when payments are nine months, or 270 days, late. Private student loans can default after three missed payments or 120 days. But be sure to check your loan's promissory note to understand your loan's default timing. Some private loans can default after just one missed payment.
Before federal student loans default, they enter a stage called delinquency. A loan is considered delinquent as soon as you miss a payment. However, delinquency is not reported until your payment is 90 days late. After this time, it is reported to all three major credit bureaus, which can hurt your credit rating and make it hard to get a loan in the future.
To help you catch up on repayments, some lenders might offer a loan modification to lower your monthly payment amount. Loan modification usually means changing the terms of the loan so you can repay it easier.
What could happen if I default on my student loan?
As part of its coronavirus relief plan, the U.S. government paused loan payments and set interest rates to 0% for certain federal student loans until May 1, 2022. Find out if this applies to your loan here.
Defaulting on a student loan can cause many problems, including these:
- Wage garnishment. Garnishment means loan holders can legally collect your pay and your tax refunds to cover your student loans.
- Damage to credit score. A student loan default can stay on your credit report for seven years. This can make it hard for you to borrow money to buy a car, home, or other items later. A default can also keep you from renting an apartment or signing up for a new cell phone plan.
- Higher interest. Late fees and interest on the debt will pile up. Additionally, loan holders may make you pay for their collection costs on your defaulted loan. Collection costs can be up to 25% of what you owe.
- Impact on future student loans. If you default on a student loan, you might not be able to take out any other student loans or get other federal aid for school.
- License suspension. In many states, your driver's license, medical license, teaching license, or other professional license, may be suspended due to a student loan default.
What can I do to get out of default?
After defaulting on a student loan, the first thing you can do is contact the organization that told you about the problem. The sooner you call to discuss your options, the better, as more options will be available. You may still be able to modify your loan terms, or potentially make retroactive changes, if allowed. Often, service representatives will know what options are available for your specific situation.
You may still have some options after defaulting:
- Repay the loan. Defaulting on a student loan means you owe the full amount immediately. If you can afford to pay off the loan, you can get rid of the debt right away. Repayment likely will not be an option for most borrowers who default. There may be other options available to avoid increasing your debt.
Some borrowers may be able to get out of default if there was a clerical or payment error, such as an auto-pay failure. If you contact your loan provider immediately upon finding out you missed several payments due to a clerical or payment error, they may be able to return your account to good standing and remove the default.
- Rehabilitation. Student loan rehabilitation is the best option for most borrowers. It can remove the default from your credit report, but late payments already reported will remain.
To rehabilitate your loan, you must usually make nine monthly loan payments within ten months in a row. These payments are generally 15% of your discretionary income.
You can only rehabilitate a student loan once. Before you choose this option, be sure you can afford it.
- Consolidation. If you cannot afford to pay your loan in full right away, you might be able to consolidate to resolve your debt. Commonly, borrowers will consolidate, or combine, multiple loans into one new loan. This new loan can include lower payments, but may extend the loan for several more years, or charge a different interest rate. Income-based repayment plans may be an option as well.
Unlike rehabilitation, consolidation cannot remove the default line from your credit report.
Can I get out of student loan debt by filing bankruptcy?
Generally, no. You can usually only get out of having to pay student loan debt, called discharging it, in bankruptcy if you can prove that payment would be an undue hardship on you. In some cases, a court may end up discharging your loan if they are convinced you will never be able to repay it. If you have other debts, such as credit card debt, that make paying your student loan payments difficult, those debts may qualify for relief in a bankruptcy.
I believe my student loan debt went into default by mistake. How can I fix it?
If you believe your loan was placed in default by mistake, the first step is usually to make sure you have met all of your responsibilities as a borrower.
For example, you are likely responsible for letting the loan holder know if your contact information changes. If you change your address without telling your loan holder and your billing statements do not come to your new address, you are still responsible for making payments. Review your records, particularly for proof of payment, then contact your loan servicer with evidence of the error. Service representatives will likely be able to correct any mistakes.
Are there ways to get my student loan forgiven?
The federal government offers a few programs to help students get their loans forgiven. These are some examples:
- Teacher Loan Forgiveness Program. This program is for borrowers who are teachers.
- Public Service Loan Forgiveness Program. If you work for the government or a nonprofit organization, you may be able to get loan forgiveness.
- Total and Permanent Disability Discharge. If you become disabled, you may qualify for federal student loan forgiveness.
- Perkins Loan Cancelation and Discharge. You may be able to have all, or some, of your Perkins Loan dismissed based on employment or volunteer service.
Also, each state may offer its own unique loan forgiveness programs. Some private employers may also offer loan repayment incentives.
Can the IRS take my tax refund if I owe student loan payments?
Yes. A federal student loan is seen as federal debt. This means that the IRS can garnish your tax refund if you have defaulted on the loan.
These are two laws that let the IRS garnish your tax refund for student loans:
If you took out a private student loan, these laws would not apply to you. However, wage garnishment is a risk with private student loan debt as well.
For answers to your legal questions about student loans, loan delinquency, default, or forgiveness, reach out to a Rocket Lawyer On Call® attorney.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.