What if you default on your federal student loan?
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For many student loan borrowers, the amount they pay for their debt each month is not insignificant. Indeed it is average monthly student loan payment is currently $ 393 which can be an overwhelming expense if you’re struggling to make ends meet.
But get in the habit of missing out on your student loan payments and you run the risk of eventually defaulting on your loans, which has serious repercussions.
As soon as you miss a payment, the insolvency process of your federal student loan begins. These are the three steps that lead to failure:
- On the first day after you missed a payment: Your state student loans are considered defaulted and you may be charged late fees.
- After 90 days or more without payment: Your credit service provider will report the defaulting account to the top three credit reporting agencies, which means it will appear on your credit report and could affect your credit score.
- After this 270 days, or about nine months, overdue payments: Your federal loan will default and you could see your debt collected.
Thanks to the Covid relief that has been in place since the CARES bill was passed in March 2020, federal student loan borrowers have a break from worrying about missing out on their monthly payments. Through October 2021, federal student loan payments will be suspended, interest rates will be fixed at 0%, and there will be no recoveries on defaulted loans.
Outside of this grace period, however, defaulted loans can have crippling effects on other areas of your life and finances. Here’s what you need to know:
The failure of your federal student loan has some serious consequences. Here are just a few examples that appeared on the Federal Student Aid website:
- Lose the right to government benefits such as repayment plans, deferment and deferral
- Be cut off from additional federal study grants
- Withhold tax refunds and / or seize part of your wages to repay a defaulted loan
- Risk of being sued by the loan service provider to collect the debt
- Put social security pension benefits at risk
- Negatively affect your credit score
Monitoring your creditworthiness
By tracking your creditworthiness, you can see how choosing to pay (or not to pay) your student loans will affect your financial well-being.
You can get your FICOÂ® Score for free from online resources like. check Experian Boost â¢ and Discover ScoreCard. Access your VantageScoreÂ® free of charge from CreditWiseÂ® from Capital One and Chase Credit Journey.
While federal student loans don’t default on payments until 270 days overdue, borrowers with private student loans are subject to the rules of their loan providers. It is important to read your loan service provider’s terms and agreements and contact a customer representative if you are unable to repay your debt.
The consequences of late payments on your personal loans will vary from lender to lender, but may include reporting your late payments to credit bureaus or referring your debt to an outside collection agency. You also run the risk of being sued by your lender for repayment of the defaulted loan. Loss of the lawsuit could result in a wage garnishment or possible seizure of your home. depending on the laws of your state.
It is best to check with your lender about any forbearance programs sooner rather than later to avoid these dire consequences.
Act quickly by speaking to your loan service provider right away about how to get you back on track.
For borrowers of federal student loans, Your options can switch to a income-oriented Repayment schedule To have a cheaper monthly payment, change the due date of your monthly payment, and streamline the repayment by a Direct Consolidation Loan or opt for Procrastination or forbearance.
Federal loans offer all kinds of protection to make your monthly payments more manageable. Therefore, we do not recommend federal loan borrowers to refinance to avoid default. By refinancing with a private lender, you will lose all of your state credit protection.
On the flip side, private student loan borrowers should consider refinancing as personal loans do not offer the same protections and benefits.
Refinancing your personal student loan (s) can allow you to streamline multiple payments into one monthly bill. You may also be able to get a lower interest rate if you qualify, which makes your monthly payments more affordable.
Private student loan borrowers should take this into account Refinancing the SoFi student loanSelect was ranked the Best Overall Student Loan Refinance Lender for its low interest rates and payment protection for borrowers. SoFi also has its own Career Advisory Group that helps members find new employment and provides access to live customer support 7 days a week. In addition, SoFi members receive free career coaching and financial advice from planners.
No origination fees for refinancing
Federal, personal, graduate and undergraduate loans, Parent PLUS loans, doctor and dentist loans
Variable rates (APR)
From 2.24%; from 2.37% for doctors / dentists (prices include 0.25% autopay discount)
Fixed prices (APR)
From 2.99%; from 3.12% for doctors / dentists (prices include 0.25% autopay discount)
Starting at $ 5,000; over $ 10,000 for medical / dental residence loans
Allow a co-signer
It is important that you pay your government and private student loans on time to avoid default. You may have more time to make a payment and avoid default on government student loans than private ones, but either way, if you’re worried about paying your bills, it’s best to act immediately.
If you are already in default or expect to be in default after the Covid Federal Loan Tolerance Period has expired, don’t wait and contact your servicer today to see what your options are.
Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editorial team and have not been reviewed, approved or otherwise endorsed by third parties.