This Is What Happens When You Default on Your Student Loans

Here's what default means and how to avoid it.

 

In 2015, 68 percent of college graduates had an average of $30,100 in student loan debt, according to the Institute for College Access and Success. If you have student loans, you’re likely putting a chunk of money each month toward paying them off. You should keep paying them off to avoid the serious consequences that result from defaulting on a type of loan.

Here’s a look at what it means to default on student loans and what happens when you do. Understand the ramifications of going into student loan default, and figure out a way to pay off your student loans to avoid the damage that comes with defaulting.

What Does Defaulting on a Loan Mean?

Default by definition means you stop making payments on a loan for a certain period of time. That period of time is 270 days for student loans, after which you are considered in default.

Failure to pay your loans without negotiating a payment plan can cause serious repercussions; it could negatively impact your credit score and result in wage garnishment.

The three-year federal student loan default rate was 11.3 percent — even for students who entered repayment programs — during 2012 and 2013 fiscal years, according to the U.S. Department of Education. Don’t become a statistic — make your student loan payments a priority or one or more of these things could happen to you:

  • Credit score damage: Your credit score will go down if you stop making student loan payments and the default status will remain on your credit report for seven years.
  • Possible compromise of employment: Employers who run credit checks as part of the screening process will see that you defaulted on your student loan. Although this might not be a deal breaker for employment, in some industries it can hurt you if you’re looking for work in the financial field or applying for positions with the federal government.
  • Wage garnishment: If you default on your student loans, your lender has the right to legally garnish your wages for 15 percent of your disposable income. You receive a notice in the mail 30 days before wage garnishment begins, and you can challenge it or agree to enter a repayment plan.

Learn: 8 Best Student Loan Repayment Plans

Getting Out of Student Loan Default

Whether you have Navient student loans, Wells Fargo student loans, private student loans or others, read your loan agreement for details about default consequences. Your loan provider might outline ways to set up a repayment plan and provide resources to help you avoid default.

If you do default on your federal student loans, take immediate steps to restructure your payments or settle the debt so it doesn’t impact your credit. Or, consider requesting a loan forbearance. A student loan forbearance suspends your payments for a period of time so you can reorganize your finances and figure out how to pay them.

If you’re in default there are ways to get out of it. Consider these five options:

  • Repayment in full: You promise to repay your student loan in full by setting up a new payment plan.
  • Loan rehabilitation: You agree to meet certain requirements in writing, including making payments equal to 15 percent of your discretionary income.
  • Loan consolidation: If you have multiple student loans with different interest rates, you might be eligible for a Direct Consolidation Loan, which features a fixed interest rate that will likely make your payments more affordable. You can apply directly through the U.S. Department of Education’s Federal Student Aid website.
  • Loan forgiveness: You might able to get out of paying student loans if you experienced certain problems at the school you attended or if you work in a public service job for a period of time. To discharge your debt, you must apply for a loan cancellation with the government.
  • Settlement: You can settle student loan debts. If you go this route, consider working with a lawyer or tax professional to uncover all the tax implications. Lenders typically ask you to pay a large lump sum for a settlement, but you can sometimes negotiate a lower amount.

Up Next: How Student Loan Forgiveness Can Save You Thousands