What Happens if I Default on My Student Loan?

In the United States, most students attending college have to pay their own way. In the 2018 year, tuition rates averaged in a range of $10,000 to $35,000, depending on the location and type of school attended. Often, students and their families don’t have this kind of money available or saved up, so student loans will be taken out to cover the costs of attending.

Borrowing in the form of a student loan can be a good investment. While the loan does need to be paid off, those who receive college educations have been shown to earn up to $20,000 more annually than their counterparts who have not. Student loans are given at low-interest rates, and repayment requirements on the loan are often deferred until the borrower finds employment after graduation.

However, you may ask “What happens if I default on my student loan?”. Even with the best intentions of satisfying your debt repayment, events in life can sometimes put this on hold or make it difficult. Let’s take a closer look below at what can happen if you aren’t able to make your loan payments.

The loan goes into default

For the first 270 days (roughly 9 months) of nonpayment with most lenders, your loan will be considered delinquent. Delinquency will damage your credit rating, making it harder to obtain other lines of credit, purchase a car, or even rent an apartment.

After the 270 day mark, your loan will most likely go into default status. When this happens, you run into a different set of issues:

  • Late fees and collection fees build up, adding to the amount of your loan.
  • The entirety of the loan becomes due at once, instead of in payments spread out over time.
  • The IRS can withhold any refund you may receive on your taxes, and instead apply it to your student loan repayment.
  • If you’re working, a percentage of your wages can be garnished to repay the loan.
  • A portion of your social security and disability payments can be taken to repay the loan.
  • The lender can sue you.
  • You can become ineligible to receive any future federal student aid or grants.

What to do if you default on your loan

Avoiding defaulting on your loan is preferable, but sometimes unavoidable. Fortunately, if this happens to you, there are steps you can take to resolve the issue:

  • If you work in specific job fields, namely in public service positions, you can apply for Public Service Loan Forgiveness (PSLF). Forgiveness of your loan can sometimes be awarded if you have worked in your field for at least 10 years.
  • Look into Contingent or Pay As You Earn (PAYE) plans. These plans are based on your income and can lower your monthly repayment amounts to be within 20% of the income you have left after paying for bills and utilities. With these types of plans, you can often have the remainder of your debt forgiven once you have met a certain number of required payments.
  • Contact your creditor and request a revision of your payment plan. Doing so won’t always work after you’ve defaulted, but sometimes creditors are willing to work with you.

If you are sued

If you receive notice that you are being sued before you can create a solution for repaying your debt, hire an attorney right away to help you navigate the process. It’s crucial that you do not put off or ignore any litigation. The right attorney will present you with all possible options you have and help you settle the lawsuit in a way that’s amicable for both you and your creditor.

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