Defaulting on your student loans is a serious business that comes with a lot of negative impacts. If you’re struggling to pay your student loans, you’re not alone but you can’t ignore them or things will get much worse.
If you’re overwhelmed by your student loan burden, try these other options to avoid defaulting at all costs. Your future self will thank you.
What Does It Mean to Default On Your Student Loans
When you take out student loans, you sign a promissory note. This is a legally binding contract that explains your rights and responsibilities with the loan and repayment. The first time you miss a payment — even if it’s a day or two late — your loan is delinquent.
If you repay your loan monthly, it becomes delinquent if you don’t make a payment for 270 days. If you have FFEL Program loans, it’s 330 days.
What Are the Consequences?
Frankly, there are a lot. The entire balance of your loan as well as interest is due immediately. You lose eligibility for repayment plans, deferment, forbearance and additional federal student aid. Your account is assigned to a collection agency and reported to credit bureaus, which damages your credit.
Your federal and state taxes may be withheld, which means that the IRS can use your tax refunds to pay off your defaulted loans. The loans will increase because of all the late fees, additional interest and any other costs that come with the collection process. Your employer can send your pay to the government if the government requests and the loan holder can take legal action against you.
So, yeah. Those are some pretty intense consequences. It could take years for you to recover from the damage defaulting does to your credit and everything else.
How Do You Avoid It?
Luckily, there are some other options before you default on your loans if you’re struggling with money:
Refinancing is a good choice to help get a lower interest rate, particularly for private loans. Federal loans usually have a longer repayment period as well as some other benefits, so it’s something you’ll want to think hard about doing to your federal loans. See how much you’re really going to save before you jump in.
The key to refinancing is paying more than the minimum payment. Though that sounds crazy, that’s how you fully take advantage of that lower interest rate and pay a lot less in the long run.
Related: Refinancing Vs. Consolidation
You might already know what deferment is, as the government defers your loans while you’re in school. This puts a temporary pause on payments, and you might not have to pay interest, either, depending on your loan.
Some circumstances that make you a contender for deferment include unemployment, being in the Peace Corps, on active military duty or earning a monthly income that’s less than 150% of the poverty level in your state. There are different applications for each circumstance, so you would have to talk to your loan servicer to see which one to use.
However, this is definitely a temporary solution. It’s not something that can be extended for the long term.
Forbearance also puts your loans on pause, though it’s usually for a limited amount of time. The interest accrues during the forbearance, no matter what kind of loans you have.
You’re a contender for forbearance if you’re going through a serious financial hardship or medical issue. That’s called discretionary forbearance, and lenders aren’t required to allow you to do this, but there’s a decent chance they will. If you’re in a medical or dental internship or residency, active in the National Guard but don’t qualify for the military deferment or are currently in the process of qualifying for Teacher Loan Forgiveness, you’re also qualified for this.
As with deferment, this is also a temporary solution. It’s usually limited to a certain number of months.
This lets you consolidate all your loans into one big loan. With this, you don’t have to remember a bunch of different repayment dates, which is nice, but you can’t consolidate federal and private loans together.
You might be able to lower your interest rate or get a fixed interest rate instead of a variable one. You can also get your monthly payment amount lowered. However, this does come with a price.
Lowering your monthly payment amount means extending the repayment length of the loan. If you’re thinking that means you have more time to pay it off, though, think again. It means the interest is going to be seriously adding up. This is another situation where you should try to make more than the minimum payment so you can compound less interest.
5. Earn More and Lower Your Expenses
I realize that it’s easy to say things like “earn more money” but it can be a challenge to find a new job or establish an additional stream of income. This is why I recommend lowering your expenses as early as possible. You may have to cut out extra budget items like dining out, your gym membership, your cable bill, etc.
You can get a roommate or move in with relatives temporarily to lower your living expenses. Moving back in with your parents doesn’t sound glamorous, but it may be better than sinking your credit score and potentially having your wages garnished if you let your student loans go into default. Try to create a bare bones budget to use so you can free up more of your income in order to continue making student loan payments.
If your minimum monthly payments are high, see if you can use any extra income you receive like bonuses and tips to put toward your loans. You can also apply to different part-time jobs that will allow you to work flexible hours on off days from your main job. One of my favorite flexible jobs is being a brand ambassador and product demonstrator because it pays good money and shifts are usually short around 3-6 hours.
You can also sell some items you don’t need, walk dogs, babysit or tutor, start driving for Uber, or even freelance. Every little bit you earn will help.
Defaulting isn’t something to be taken lightly, but neither are any of the alternatives. Do your research and make sure you’re finding what’s truly the best option for you!
Do you have student loans? Were you aware of all the consequences associated with going into default? How are you avoiding letting your loans go into default?
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