How to Avoid Student Loan Defualt | 01.19.11
Navigating student loan payments can seem daunting. Before you know it, you’ve graduated and need to start making payments. So what happens if you are unable to make your monthly payments? You can soon find yourself in default.
What it Means to Default on Your Loans
Most loans provide a grace period, (usually about 6 months) where you can live payment-free. So what happens when your payments start and you are unable to pay? This depends on the type of loan you have. With Federal loans, as soon as you miss a payment you are considered in a state of delinquency, meaning your payments are late. At this point, you have 9 months in delinquency before you are in default. Private loans are a little different; you are considered in default as soon as you miss a payment. Once you default, the full balance of the loan is due IMMEDIATELY. Defaulting on student loans can have a lot of repercussions. You will be ineligible for deferment of your loans, your wages can be garnished, and your credit record will be changed, making it difficult to obtain a credit card, auto loan, mortgage, and even a job.
Read on to find out how to avoid loan default.
How to Avoid Default
Make sure you know how long your grace period is. With most Federal loans the grace period is 6 months after graduation. For private loans, the terms would have been described in your loan agreement, but you can always contact your lender to confirm. Sometime within that grace period you should consolidate your loans. Consolidation lessens the amount you must pay each month and combines your loans into one payment per month. It is important to note, however, that although the monthly payment is lowered, the overall length of repayment is extended and can therefore accrue more in interest.
Deferment is another option. You can defer your student loans while attending school at least half-time, while unemployed or experiencing economic hardship, or studying in an approved graduate fellowship or rehabilitation program for the disabled.
Forbearance is similar to deferment, except while you do not have to pay the principal, you still need to pay the interest. You must get permission from your lender to enter forbearance, and can only do so if you 1) have financial hardship 2) are teaching in a teacher-shortage area or 3) have an unusual life circumstance.
Already in Default?
The best thing to do if you are already in default is to consolidate! Consolidating your defaulted loans into a new loan does two things: First, it shows that your defaulted loans have been paid in full, basically allowing you to start over. Second, consolidating your loans into one payment will make it easier to keep track of, as well as lower your monthly payment.
If consolidation is not an option, you can request loan rehabilitation. Once you’ve requested rehabilitation from your loan servicer, the next step is to negotiate a reasonable and affordable monthly payment. Federal Direct and FFEL loans require that you must complete 9 timely and consecutive payments within a 10 month span. This allows you to miss only one during the rehabilitation period. For Perkins loan rehabilitation, you must pay 9 consecutive payments within 9 months. After this period you are no longer considered in default and your loans will once again be eligible for the previous benefits such as deferment, forbearance, and title IV eligibility.
If you default on private student loans, there is not much you can do other than repay it; nevertheless, contact your lender to find out what options are available.
For further information, read about how to avoid defaulting on your student loans.
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