What Do I Do if My Loan Goes Into Default?

Student loan debt can be overwhelming. With more than $137 billion in education debt (and counting), 8 million borrowers failed to make payments in 2016. When you stop paying your student loans, you go into default, a situation that leads to more debt and a major hit on your credit score.

While avoiding default is the best option, if you’ve already gone into default, there are options available to help you get back on track.

What Happens When Your Loan Goes Into Default

By the time a student loan goes into default, you would have already received multiple calls and letters from your loan service provider requesting payment. After default, these communication attempts continue, only now you must deal with debt collectors.

Plus, when you default on a federal loan, you immediately lose access to any repayment benefits once offered, including forbearance, deferment, and income-based plans. You also can’t go back to school using financial aid unless the loans are in good standing.

Defaulting on private student loans comes with the same consequences, but you can also be hit with legal action depending on where you live. The lender can sue for the unpaid balance and get a judgment against you and any cosigner, meaning that they can garnish your wages, property, and other assets until the debts are repaid.

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Understand Your Options During Default

Getting out of student loan default is no easy feat, but you do have options.

Repayment in Full

For starters, you can repay the entire loan balance in full. This simply isn’t an option available to many, so unless you win the lottery or unexpectedly come into a large sum of money, repayment in full rarely happens.

If you are able to repay the entire amount, however, be sure to ask the lender for the exact payoff amount.

Loan Rehabilitation

Entering into a loan rehabilitation program with the Federal Education Department is the most practical option for getting out of default for most borrowers. As long as you adhere to the terms of the agreement, the default can be wiped from your credit reports. In general, loan rehabilitation involves making 9 out of 10 affordable monthly payments within 20 days of the due date or making all 9 payments during a consecutive 10-month period.

During rehabilitation, the monthly payment cannot be more than 15 percent of your annual income divided by 12. To qualify, you must provide income documentation to the loan service provider. 

Loan Consolidation

Consolidating a federal loan is a smart move when faced with default. Even if you only have one defaulted loan, you can still apply for the Federal Direct Consolidation Loan if you know you can commit to the repayment plan.

After loan consolidation, you must make at least three consecutive on-time payments on a defaulted loan or enter into an income-driven repayment plan. Once the application is accepted, you have 15 days to review the terms and agree to the plan.

Defaulting on a federal student loan is nerve-wracking, but it’s not the end of the world. Consider your options and act quickly to get back on track.