Students take the debt with the hope of getting an education and having a bright future. However, most of them struggle to find a job, or the current income levels do not let them repay the debt effectively. Unfortunately, default rates are higher than ever on educational loans. While its causes are understandable, the student loan default is an extremely harmful process, bringing many drawbacks. Hence, borrowers should make anything possible to avoid the default or get rid of it quickly. This guide will explain the default process in detail and provide strategies for avoidance or removal of default status.
Student loan default does not happen in an instant. When the borrower does not make the payment, first, the delinquency process starts. If during delinquency, payment is still not made, the default process starts. Even if the officials decide to collect money involuntarily through wage garnishment or Treasury Offset, they notify the borrowers many days ahead. Hence, debtors can act quickly to resolve the issue before experiencing the negative effects of default.
Besides the borrower’s own initiatives, third party experts on debt and finances management like Student Loans Resolved can help avoid or remove the default status. Our experts have years of experience in this field compared to borrowers who will have a hard time understanding legal or loan terms. Hence, specialists are better able to analyze the conditions and provide suitable student loan default help.
What is Loan Delinquency?
Debtors are obliged to make monthly payments as agreed on loan terms. The bills that debtors receive indicate the amount of payment and its due date. Delinquency is a state of non-payment. If a borrower misses the deadline for payment, the debt becomes delinquent till the payment is made. Alternatively, it is possible to eliminate delinquency status by entering a loan forbearance period or changing repayment plans. The delinquency stage is before the student loan default. Not meeting the obligation within 90 days can cause extreme problems for the borrower. Once 90 days are passed from the due date, the loan servicer will contact the three biggest credit agencies and notify them about the situation. In this case, the borrower’s credit rating will fall.
Some people choose to ignore the student debt problem and think that delinquency is more desirable than repayment. However, getting poor credit performance will have years-long effects. Even after some time, the borrower will still struggle to receive credit cards, get loans, insurance, or rent an apartment. Sometimes they can still qualify for a credit line, but the interest rate will be significantly high.
What is Student Loan Default?
After the delinquency stage, default status follows the loan if the borrower does not take necessary actions. It is not exactly how much time passes since the delinquency for the loan to default. For Direct debt or Federal Family Education Loans, this period is a minimum of 270 days. If the debtor does not make the payment 270 days after the due date, the loan can default. For Perkins loans, the default condition is much stricter. The loan is considered defaulted once the debtor misses the due date.
As the default is not desirable, it is advisable to act quickly. Once a borrower gets a notification about default, he/she should contact the sender as soon as possible. In this case, the borrower can explain the situation and maybe get access to repayment options. When student loan default is resolved quickly, its negative consequences can be eliminated.
Negative Impact of Default
Student loan default leaves a huge negative effect on the borrowing ability and the finances of debtors. As mentioned before, the borrowers will have a lower credit rating. As a result, these borrowers will face challenges in getting new credit lines, car loans, insurance, or renting an apartment. However, the list continues. First, the defaulting will make the total debt balance immediately payable, including the interest. In this case, debtors cannot take advantage of the forbearance or non-collection period. Besides, they will lose access to any federal aid or repayment plans.
If debtors do not meet their obligations, there can be forceful actions to collect the money. One of them is the withholding of tax refund or benefit payments. This strategy is called the Treasury offset. Another way to collect the debt is by taking the debtors’ wages. Employers may be obliged to pay your wage to the loan holder. Even worse, the lender can sue the debtor. It is a nightmare because borrowers can be responsible for court or attorney fees, as well as collection costs. Lastly, the student loan default can give the school a right to withhold the transcript. The school can demand the borrower to make the payments, or the borrower will not get the transcript. In such cases, the Education Department or loan holder cannot interfere with this decision or make the school give a transcript in any way. It is solely the decision of the school whether to release the transcript or not.
What if the Debt is Put into Default Mistakenly?
If the borrowers believe that there is no reason for them to default, they can search for ways to correct this mistake. There exist several conditions when the debt cannot default. For example, if a debtor studies half-time and has deferment status on loan, he/she cannot default. In this case, mistakes can happen due to an incomplete record of attendance. Hence, the borrower should contact the school registrar to get attendance records. It is also necessary to contact all the schools attended to have complete information. Next, the debtor should discuss the issue with the lender and supply attendance proofs if needed.
This case also applies to debtors who do not study but have deferment or forbearance status. If they receive a default notification, the problem can be with incorrect start and end dates of these statuses. Therefore, they should contact the loan servicer and recheck the start and dates of forbearance status. If the loan servicer has wrong information, submitting documentation with correct dates will be enough.
Lastly, though the student loan borrowers make payments on time, they can still get default information. Here, the problem happens if the loan servicer does not see all the payments you made. In this case, submitting the proof of payment will solve the problem.
This entity deals with the borrowers and recovers the unpaid debt from student loan default. If your loan is transferred to a collection agency, it is bad news. In this case, the costs that the loan holder incurred to collect money will be the debtor’s responsibility. In general, these collection costs can account for almost 18% of your debt from the Department of Education. Various loan holders charge different rates. It should be mentioned that these collection costs are not part of the debt; they are payable in addition to the original debt amount, interest, and other fees.
When the collection agency is involved in a student loan default issue, they will first contact the borrower and request a voluntary repayment. If a debtor does not want to agree to voluntary repayment, the collection agency will move to the next stage, a collection by garnishing the wages. Student loan default wage garnishment is a common process and can also happen if the borrower agrees to voluntary repayment but does not comply with the terms. Wage garnishment happens through the employer, who will directly pay your wage to the loan holder or collection agency.
However, it is possible that the debtors do not work or they are self-employed. Keep in mind that a loan agreement is a legal document, which means you can face legal consequences if you do not meet the loan obligations. Hence, in this case, with the Education Department’sDepartment’s referral, your default on student loans will experience a legal action. In other words, the Department of Justice will sue the defaulted borrower to collect the debt.
Although it is the collection agency’s responsibility to make the debtor repay, they cannot go further than legal action. For example, they cannot harass or physically abuse the debtor or utilize unfair collection strategies. Plus, they cannot mislead the borrower with false information only to collect the money.
As mentioned before, in the case of federal student loan default, the government can collect the debt in two ways, by taking tax refunds or other federal benefits and wages. When the Department of Education requests the Department of Treasury to take tax refunds, Social Security payments, or other benefits, the process is called Treasury Offset. Borrowers of Federal Family Education loans can face other collection methods, such as withholding state tax refunds. Besides, such debtors can lose their permissions like drivers’ licenses.
Before the Treasury Offset is implemented, the borrower is notified about the process. Usually, the officials send the notification 65 days before the collection process. They send the notification to the last known address of the borrower only once. The process will continue till the student loan debt is fully covered. Sure, the borrower has the right to request a review. In this case, if the request is accepted, the borrower can get rid of Treasury Offset based on reasonable grounds, or the amount of offset can be lower. However, the review also might not benefit, and the offset process will continue.
Withhold of Social Security benefits needs further clarification for permanently disabled people. Such an offset can be ceased if the Social Security Administration confirms that the borrower is completely disabled and the situation is not expected to change. In this case, the withholding will not happen. However, if, in the future, the disability benefit is transformed into a retirement benefit, the withholds will resume. Debtors should be careful in such a process because there will be no notification informing the resumed collection.
Borrowers who need to clarify issues regarding offset can contact their loan holders.
Another way to collect debt in case of student loan default is through wage garnishment. Garnishment is the process of taking a maximum of 15% of the borrowers’ wages to repay the debt. 15% is applied to disposable income, which is calculated by making deductions. The student loan default wage garnishment process continues till the debt is fully paid or the loan’s default status is removed.
Rights of Borrowers
Again, the debtors will have some rights even if the wage garnishment is announced. Different from Treasury Offset, the debtor gets a notification about garnishment 30 days before the start. In this notice, the debtor will also find information regarding the total amount of debt and his/her right to object or benefit from a voluntary repayment agreement.
The debtor can object to the wage garnishment process based on several factors. First, the debtor can have objections about the debt itself, its amount, or enforceability. Second, borrowers can argue that taking 15% of their income will leave them in extreme financial challenges. Also, there are conditions for involuntary employment separation. In such cases, requesting a hearing will suspend the garnishment process till the officials make a decision.
Some people might worry about their employment status if the employer knows about the student loan default wage garnishment. However, the borrower has a right not to be discriminated against in recruitment for such a reason or not to be discharged. If an employer violates these rights, the borrowers can take legal action against the employer.
Avoiding Wage Garnishment
Avoiding wage garnishment is possible if the borrower agrees on voluntary repayment. They can negotiate the terms with the Education Department or a collection agency to have a suitable plan. The main factor here is that the ED should receive the first voluntary payment within 30 days after receiving the garnishment notice. Another way is through requesting a hearing, as mentioned previously. Borrowers can request a hearing again within 30 days after the notice, in a written form. Some people might wait for the garnishment documents before requesting a hearing. However, it is a mistake because the 30 days period starts even if you have not got the documents.
Hearing requests will only be successful if the borrower can support the arguments. Here, the documentation is important as proof for rejection. Plus, keep in mind that the debtors are responsible for the legal costs of the hearing. The loan holder will arrange the hearing, and it can happen in person or on the phone. Alternatively, the officials can just review the case based on the records. It takes around 60 days to get the final decision. In case of objection approval, wage garnishment can stop or decrease. The suspension will be applicable only for a year. On the other hand, rejection will require a resume of the wage garnishment process on student loan default.
We will discuss the solutions for removing student loan default, but it is more effective to take protective measures not to default in the first place. When a borrower receives a delinquency notice, he/she can still avoid the default. It is essential to contact the loan servicer immediately to discuss the possible options.
Avoiding student loan default should be a significant consideration from the very beginning when the borrowers sign the agreement. The debtors need to get familiar with the loan terms and not attempt to receive more money than they need. Student loan borrowers should repay the debt even if they do not complete the education. It means not having a degree can be a barrier to employment, but the borrower will still be obliged to repay the debt. Hence, avoiding unnecessary debt is one of the first conditions. Besides, the loan type, interest rate, and repayment conditions should be checked thoroughly.
People in need of student debt can estimate their costs to determine how much debt they need. Next, contacting the school officials is necessary to find the maximum or minimum limits of the borrowing. The government also provides financial awareness counseling services. It takes 20-30 minutes and helps potential borrowers to understand their responsibilities.
Keeping Track of the Loan
The government also provides an online platform for borrowers to get information about their loans. Once the debt is received, checking this platform regularly can keep the debtors alert about student loan default risks. Besides, being organized is important. Borrowers should keep all the related documents such as promissory notes, payment schedules, or payment proofs in one place. As a result, if a problem occurs, the debtor will have proof to solve it. Another effective strategy is to maintain close communication with the loan servicer. The servicer should be informed about any changes in your situation, such as when you graduate, withdraw, transfer to another school, move to a new address, get a new phone number, etc.
If a borrower starts to notice that he/she will not be able to make monthly payments, they should immediately contact the loan servicer. In this case, they will have several options to choose from. They can change the repayment plan to have a lower interest rate, move to income-driven repayment plans, adjust the due date or quality for the forbearance. In no case, the borrower should ignore the payments, the delinquency, or default notice.
Debt Consolidation is also advisable for avoiding student loan default. Consolidation involves combining several loans into one. Hence, the debt repayment will be simplified, and the borrower will keep track of the responsibilities. However, there are advantages and disadvantages to this solution.
Pros of Consolidation
Student Loan Consolidation merges loans from different loan servicers. Hence, the borrower does not need to deal with various, overwhelming terms. Instead, they will have a single monthly payment and loan to take care of. Besides, consolidation can prolong the repayment period, which means the monthly payments can be decreased. When switching to consolidation, variable rate loans will have fixed interests. Therefore, the increasing interest rates in the market will not cause a student loan default. Lastly, consolidation gives access to Income-driven repayment plans and Public Service Loan Forgiveness programs.
Cons of Consolidation
Yet, the program also brings its downsides. Though the monthly payment decreases, the repayment period becomes longer. It means the borrowers will have to deal with the debt for many years, up to 30. Additionally, the outstanding interest on original loans will become a principal in the new loan. In this case, the interest rate will apply to a higher principal balance. Next, the consolidation can lead to the loss of some benefits such as cancellation or rebates. Borrowers intending to take advantage of Public Service Loan Forgiveness will also lose credits they acquired.
If you could not avoid the student loan default, do not lose your hopes. There are still some ways to get out of the default on student loans. One option is to pay the debt fully. However, it is understandable that the defaulted borrower might not have the financial ability to resolve the problem in this way. Hence, more suitable options can be student loan default rehabilitation or debt consolidation.
Rehabilitation is the process of voluntary repayment. Once borrowers rehabilitate the defaulted debt, any negative effects of the default on credit history will be removed. However, the late payments will still appear on the credit rating. The terms of rehabilitation change depending on the loan type.
Federal Family Education and Direct Loans
Student loan default rehabilitation for these loans requires the borrower to make nine payments. These monthly payments should be made within 20 days of the due date and should happen within 10 months. Student loan rehabilitation will also involve 15% of the annual discretionary income, divided by 12. This calculation will determine the number of monthly payments. Sometimes, even this amount can be high for the borrowers. In this case, they can ask the loan holder to change the monthly amount considering the expenses. The debtor should provide the form and information about income and expenses. As a result, the loan holder might ask for a lower monthly payment than the original one to cover student loan default.
Even if the borrower agrees on student loan default rehabilitation, the collection process like Treasury Offset or wage garnishment can continue. These collections will not count as a part of a nine-month requirement because they are involuntary. Once a borrower makes a voluntary nine payment, the default on the student loan will be removed.
Perkins loan rehabilitation has a condition that requires voluntary payment of the full monthly amount nine times. Again, the payment should be within 20 days of due and during the consecutive months. The loan holder will determine the payment amount.
Advantages of Rehabilitation
The rehabilitation process will improve credit performance because the student loan default status will be removed. As a result, the involuntary collection like student loan default wage garnishment or Treasury offset will stop. The borrowers will again qualify for the forbearance, deferment, repayment options, or loan forgiveness programs. However, keep in mind that rehabilitated loans cannot be rehabilitated for the second time. Hence, using the strategies mentioned above to avoid the default is necessary after the student loan rehabilitation.
Consolidation after Default
Another way of getting rid of default is through consolidation. The basics of the consolidation were explained in the previous sections. Defaulted loans can be consolidated if the borrower agrees to an income-driven plan or makes three payments voluntarily. Such payments should be on-time, cover the full amount, and be made consecutively. The loan holder will determine the amount based on the debtors’ financial conditions.
Some people have consolidated direct loans or FFEL loans, but the default. In this case, they can reconsolidate with specific requirements. First, the consolidated direct loan can be consolidated with another existing loan. If the borrower does not have any other debt, then he/she cannot reconsolidate. Such borrowers can eliminate the student loan default through either full repayment or rehabilitation. On the other hand, consolidated FFEL can benefit from second-time loan consolidation without involving any new loan. Yet, in return, the borrower should agree to make payments under an income-driven repayment plan. It is also possible to use a new loan to combine with the FFEL consolidated loan.
Student loan default rates are high, and many borrowers struggle to find an option. In this guide, we explained the details of the default process. Besides, strategies to avoid or remove the default status were presented. It is always desirable to take protective actions and consider the student loan default risk from the very beginning of debt acquisition. In this case, the debtors will be more familiar with the negative impact and do the best to avoid the default.
However, avoiding strategies does not guarantee success. Hence, if a debtor defaults, he /she should consider ways to get rid of it quickly. Loan consolidation and rehabilitation might help borrowers in this case. Additionally, the borrowers can contact debt specialists, such as the ones Student Loans Resolved work with. Our experts will collect as much information as possible from the debtor to analyze the problem thoroughly. As a result, they can find the most suitable solution. Although different ways of student loan default help exist, they all have pros and cons. Hence, an expert opinion is necessary to determine the most beneficial solution.