Student Loan Default 

Taking out student loans to finance higher education is a significant financial decision. 

While a college degree can lead to increased earning potential, it is crucial to understand the responsibilities that come with borrowing money. When you sign a promissory note for a loan, you are legally agreeing to repay that debt, regardless of whether you finish your program. 

What is student loan default? 

Student loan default occurs when a borrower fails to make payments according to the terms of their loan agreement for an extended period. For most federal student loans, this period is 270 days (about nine months) of nonpayment, though some loans may default sooner.

Default versus Delinquency

Default should not be confused with delinquency. A loan becomes delinquent the first day after a missed payment. After 90 days of delinquency, your loan servicer will report it to the national credit bureaus, damaging your credit score. If you do not resolve the delinquency, it can escalate to a full default.

Consequences of Default

Defaulting on a student loan is a serious matter with lasting negative effects on your financial future. The consequences can be severe and far-reaching, including:

  • Credit score damage: A default is reported to credit bureaus, severely harming your credit rating. This can remain on your credit report for seven years and will make it much harder and more expensive to obtain loans for a car or home in the future.
  • Loss of eligibility for aid: You will lose eligibility for additional federal student aid, such as Pell Grants and other loans, meaning you cannot return to school using federal financial assistance.
  • Forfeited tax refunds and benefits: The government has the authority to seize your federal and state income tax refunds and apply them toward your defaulted loan balance. In some cases, federal benefit payments may also be withheld.
  • Wage garnishment: Your loan holder can legally require your employer to withhold a portion of your wages (up to 15% for federal loans) and send it directly to them to repay your defaulted loan.
  • Immediate loan acceleration: The entire unpaid balance of your loan, including any accrued interest, may become immediately due. This process is known as acceleration.
  • Loss of benefits: You will lose access to beneficial repayment options like deferment, forbearance and income-driven repayment plans.
  • Collection and legal action: Your loan may be sent to a collection agency, and you will be responsible for paying additional collection costs and attorney's fees. Your loan holder can also sue you.

Avoiding Default

Avoiding default requires a proactive and informed strategy from the start.

Before You Borrow

  • Borrow only what you need: It's tempting to borrow the maximum amount offered, but only take out what is necessary to cover your educational expenses.
  • Understand your loans: Read your promissory note carefully to understand the loan terms, interest rates and your responsibilities. Log in to StudentAid.gov to see a summary of all your federal loans.
  • Create a budget: Develop a realistic budget to understand how much you can comfortably afford to pay back each month after graduation.

Entering Repayment

  • Know your servicer: Your loan servicer is the company that handles your billing and payments. As your grace period ends, familiarize yourself with your loan servicer.
  • Set up auto-pay: Consider signing up for automatic monthly payments. Many servicers offer a 0.25% interest rate deduction for this, and it prevents missed payments.
  • Keep good records: Maintain a file of all important documents, including financial aid offers, loan amounts, account numbers and any correspondence with your servicer.

Repayment Challenges

If you are struggling to make payments due to job loss, low income, or other financial hardship, do not ignore the problem. Act quickly and contact your loan servicer immediately.

  • Switch repayment plans: Federal student loans offer several repayment plans.
    • Income-Driven Repayment (IDR) plans: Your monthly payment is capped at a percentage of your discretionary income and can be as low as $0 per month. These are often the best option for borrowers with low income.
    • Extended Repayment: This plan lowers your monthly payments by extending the repayment term for up to 25 years.
  • Use deferment or forbearance: These options allow you to temporarily pause or reduce your payments for a period of time, though interest may still accrue. They are a valuable tool for short-term financial binds.
  • Refinance: For borrowers with good credit, refinancing through a private lender can potentially lower your interest rate. However, refinancing federal loans with a private lender means losing access to federal benefits.

Getting out of Default

If you have already defaulted on a federal student loan, there are still options to regain good standing.

  • Loan rehabilitation: This program allows you to make "reasonable and affordable" monthly payments over a set period of time. Upon successful completion, the default is removed from your credit history, though past delinquencies will remain.
  • Loan consolidation: You can take out a new Direct Consolidation Loan to pay off your defaulted loans. To qualify, you must either agree to repay the new loan under an IDR plan or make a set number of on-time payments on the defaulted loan first. Consolidation does not remove the default from your credit history.
  • Repay in full: While not practical for most, paying the loan's full balance will clear the default.

Navigating student loans can be challenging, but understanding the serious implications of default is essential for any borrower. By proactively managing your borrowing, understanding your repayment options, and communicating with your loan servicer when facing difficulties, you can avoid the severe financial consequences of default. 

Remember that knowledge and early action are your best defenses against a financial crisis. If you have questions or would like to talk with a counselor about this topic, please reach out to Columbia Southern University’s Office of Financial Aid at FinancialAid@ColumbiaSouthern.edu.