What Happens If You Default On A Student Loan?
A default happens when you stop making payments on your student loan account. Once your account is marked as default, the lender will start looking into legal ways to collect the debt. Defaulting on a loan can have a huge negative impact on your credit history,
thus lowering your credit score. It can lead to losing eligibility for other financial aid from the government, having your wages garnished, tax refunds held back, and being forced to pay high fees to collection agencies.
The severity of the impact will depend upon a number of factors such as the type of loan that you have defaulted on. Read on to learn about the consequences of default and how to get your credit back in shape.
When Can It Occur?
If you owe on a federal student loan and haven’t been making payments for nine consecutive months (270 days), you’ll enter into default status. However, your account will be marked as delinquent as soon as you miss the first payment. A record of missed payments will appear on your credit report and impact your credit score after 90 days.
Some loans, such as the Perkins loan, enter default even if you miss just one payment. These missed payments stay on your credit history for seven years, thus making it difficult for you to get further loans and credits.
Can It Affect Your Credit Score?
FICO is the standard credit scoring model that’s most commonly used by credit bureaus and lenders. In this model, your payment history contributes to almost 35% of the credit score. This means that even if you miss a single payment, it can have a negative impact on your score.
If you’ve defaulted on a federal student loan, your credit report will include a derogatory mark stating that the lender has filed a claim with the government. In certain cases, your loan account will be transferred to a collection agency, which will also show up in the report. Other than lowering your credit score, this detail will reflect in your credit report for seven years.
Apart from this, the impact on your credit score is also dependent on the service provider from where you have acquired the loan. If you have taken multiple student loans from the same lender then paying the monthly bills will reflect paying off several loans. This will increase your score. On the other hand, if you miss a payment, it can impact several of these loan accounts, thus causing more damage.
How To Rebuild Your Credit
In order to get out of default, federal student loans allow you to choose from two options. Both of these options can also help you rebuild your credit score.
Student Loan Rehabilitation
Under this condition, the defaulter must agree to make nine monthly payments within ten months. This option takes several months to complete but it also offers certain benefits that aren’t available with loan consolidation.
For instance, when you agree to a student loan rehabilitation, you’re entitled to request the removal of default records from your credit history. However, your credit history will indicate late payments that were registered by the lender before you defaulted. To start the process of rehabilitation, you’ll need to contact the loan service provider.
Once you agree, you’ll be paying around 15% of your discretionary income to the lender for the required duration. If you can’t afford the initial payment, speak to the lender to get an alternative repayment plan based on your monthly income minus the expenses. You’ll need to provide appropriate documents of your income and expenses alongside the rehabilitation form.
Another way to come out of a student loan default is to convert your defaulted loan into a direct consolidation loan. With this option, you can pay off multiple federal student loan debts with a new unified debt. To be able to consolidate a defaulted federal student loan, you must either agree to repay the new loan using an income-driven repayment plan or make three consecutive full monthly payments on the defaulted loan account.
Once your default loan account gets consolidated, you’ll be eligible for additional benefits such as deferment, loan forgiveness, and forbearance. You’ll also be eligible to apply for additional federal student aid. However, the default records won’t be removed from your credit history
Defaulting on a student loan can mean a lot of trouble for you. Other than lowering your credit score, it can also lead to wage garnishment, withholding of tax refunds, losing out on other federal financial aid options, and so forth.
If you’re finding it difficult to repay on time, then speak to the lender to figure out your options. These may include income-driven repayment plans, deferments, or loan forgiveness.