If you have student loans in default or ones that are currently past due, you need to take quick action to avoid these becoming a potential problem for the rest of your life. The consequences of a defaulted student loan are worse than that of, say, an electric or utility bill that goes into collection, or even a credit card. However, there is some help available to those that wish to remedy the past due student loans.
There are many types of student loans available to people looking to borrow money to finance education expenses. The vast majority (around 78%) of student loans are guaranteed under the Federal Family Education Loan Program through Sallie Mae. This means the government does not actually loan the money, they just provide a guarantee to the lender in case of default. The remainder of student loans are made as direct loans from the government under the Direct Federal Loan Program, which is mainly comprised of subsidized and unsubsidized loans, and many states also guarantee student loans. Those programs vary from state to state. There are also a variety of student grants available.
WHAT SHOULD YOU DO IF YOU CAN'T PAY YOUR STUDENT LOAN?
- Find out if you qualify for a forbearance. A forbearance allows you to stop making payments for a specific length of time, although interest will still accrue. They are usually granted for periods of one year, and may extend longer in certain circumstances. The most common reasons lenders and/or the government allow forbearances are health problems, unforseen personal circumstances, inability to pay within the terms of the loan and excessive debt ratio of student loan payments (meaning the payments are 20% or more of income). And in some cases, forbearances are allowed on loans already in default.
- Find out if you qualify for a deferrment. Deferrments are typically harder to get than forbearances, but other reasons, such as returning to school, may be considered. Lenders will typically not allow deferrments on student loans that are already in default.
- Look into the possibility of consolidating multiple student loans into one loan under the Direct Loan Consolidation Program. In some cases, they allow defaulted loans to be included in this program, and the terms and payments are often less. You may qualify for a consolidation loan under this program if your original student loan was through the Direct Federal Loan Program. In some cases, you may be able to consolidate loans under the FFELP program if you were turned down for another consolidation loan.
- See if you qualify for loan forgiveness. The government has special programs that may allow forgiveness of all or part of the pricipal amount of a student loan, but these typically require you to perform volunteer work, perform military service, teach or practice medicine in certain low income communities or meet certain other requirements of each individual program.
- If none of these options work AND your student loan is already in default, student loan rehabilitation may be an option. The terms of repayment will vary depending on the type of student loan. The program removes the loan from default status once a specified number of payments are made on time (between 9 and 12 monthly payments), which may qualify you for additional student loans.
In ANY case, MAKE SURE you receive written conformation of acceptance into any of these special programs to delay or cancel repayment of the loan. The government and some student loan lenders are notorious for misreporting loans as late to the credit bureaus even after a deferrment or forbearance is granted. I've seen this destroy many people's credit, but the situation can easily be remedied if the borrower has proper documentation.
CAN A STUDENT LOAN BE SETTLED FOR LESS THAN THE BALANCE OWED?
Maybe less than the amount of the collection, but usually not less than the principal amount of the loan. Keep in mind that the current balance of the collection may be higher than the amount owed when the loan went into default. Once a student loan is assigned to a collection agency, they will typically add on additional fees. For example, if you defaulted on a $1000 student loan, the collection agency that the account was assigned to may add fees, court costs (in the case of a judgment) and additional interest. This $1000 balance could easily be over $2000, depending on the laws of the state in which you reside. And they will typically NOT settle the account for less than the principal balance of the loan.
WHAT IF YOU WANT TO GO BACK TO SCHOOL AND NEED ANOTHER LOAN?
Then you must, at the very least, make arrangements to pay the delinquent balance, consolidate the loan, receive a forbearance or deferrment or qualify for loan rehabilitation. The government will not loan or guarantee another student loan for you if you currently have a loan in default.
HOW CAN YOU GET INFORMATION ON PAST STUDENT LOANS IN DEFAULT?
You should start by accessing a free copy of your credit report either though the government-mandated site that allows access to your credit report once per year for free OR a service that provides a free credit report and score with a trial membership. This will show you what damage has been done to your credit and will also provide you with contact information to both the original lender and the collection agent, if one is involved. You should also retrieve your loan information from the National Student Loan Data System, which is a repository of student loan data kept by the Federal Government. This system will allow you to access your past student loans, as well as any current data on past due or current loans. A PIN number is required to access this system, and may be obtained or changed at the Department of Education PIN Registration Web site using the option "Change Pin".
HOW WILL A STUDENT LOAN DEFAULT AFFECT YOUR LIFE?
There are many possible repercussions of student loan defaults:
- Your credit will suffer. Late payments and collections will be reported, and they will both negatively affect your credit score and credit rating.
- You will be unable to get another student loan without addressing the defaulted loan.
- Some schools may withhold transcripts.
- Your state and/or federal tax return may be garnished.
- In some states, your wages may be garnished.
- Some employers may not hire you if you owe money to the government and/or have a bad credit rating. And close to 35% of employers pull credit reports on current and perspective employees, so your job could literally be at risk.
- You will be ineligible for almost any other type of direct Federal or Federally insured loan. This includes home loans like FHA and VA loans.
Defaulting on a government loan is not something that will go away overnight. And even if the collection drops off your credit report after seven years, the government will still keep a record of the default in their database. In other words, simply removing the loan from your credit report will not make it disappear. It must be paid, settled or remedied by using one of the methods or programs described above.