Federal student loans have helped a lot of people obtain their post-secondary diploma. After graduation, though, most individuals struggle with paying off their debts. Last year, over 1.1 million people decided, for the first time, to default on their student loans. You will face the consequences if you are defaulting on your student loans. This, in turn, can affect different aspects of your life. Common consequences of defaulting on your student loans are as follows.
Wage garnishment: Your local government’s department of education may garnish fifteen percent of your disposable pay. This department does not work like private collectors, meaning it does not need a judgment for them to decide garnishment of your income.
Balance increase: Once you defaulted on your student loan, the remaining balance automatically becomes due. Collection fees and unpaid interest may also be part of your balance. Borrowers with federal family education loans must make sure to pay the former.
Credit score reduction: If your loan turns out delinquent for too long, you will be reported by the loan servicers to the three major credit agencies. If you decide to default on your loan, they will also notify you to these three credit agencies. Being reported will give you a significantly lower credit score. With a low credit score, you will have a hard time securing housing, employment, and other lines of credit in the future.
Loss of financial aid eligibility: While your student loans are in default, you will not be eligible for any other form of federal financial aid. If you are planning to return to school, you may be having problems doing so when you have defaulted on your loans.
Loss of repayment plan eligibility: One of the primary benefits of getting federal student loans is that you can, later on, take advantage of income-based repayment plans. Defaulting on your student loans leads to losing these options. Also, you will not be eligible for economic hardship forbearance or deferments anymore.
Can you get your student loans out of default?
The answer to this question depends on your situation. There are instances where you can get your federal student loans out of default by choosing one of two options. As a borrower, you have two primary options to get your loans out of default. First, you can apply for a loan rehabilitation program offered by the education department. Second, loans can be convertd into a direct consolidation loan. Both of these options have their respective advantages and disadvantages, depending on your particular situation.
If you select the first option, that is joining a loan rehabilitation program; you must make nine monthly payments for ten consecutive months within 20 twenty days of the due date. Some loans, on the other hand, require nine payment for nine straight months. You can only use this option once. If you successfully take your loans out of default, you can now qualify for other repayment programs. Additionally, default records will be taken out of your credit report.
The other option is the conversion to get your defaulted loans converted as a direct consolidation loan. This option consolidates your loan into a single loan, and you need to pay for it following a fixed interest rate. When you consolidate your loans, you can get out of default within a matter of weeks rather than months. Unfortunately, you may pay higher throughout your loan if your previous interest rate was lower.