How to Get Back on Track After Defaulting on Student Loans

Avoid damage to your credit score with a quick recovery on repayment

student loans application with calculator, pen, and eyeglasses

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With more than $1.6 trillion in student loan debt outstanding, it’s hardly a surprise that some borrowers are going to have a hard time repaying what they owe—and that there are concerns about a student loan crisis. In fact, according to the Brookings Institution, there’s a good chance that about 40% of former students who first borrowed in 2004 may default on their student loans by 2023.

What if you’re one of those who have fallen into default? When you’re in default, you run the risk of a lower credit score, wage garnishment, and other financial repercussions. Here’s what you can do if you find yourself unable to make student loan payments.

Catch Up on Late and Missing Payments

Even if you miss a federal student loan payment by just one day, you become delinquent. If you have late or missing payments, you can try to find ways to make them up as quickly as possible. However, this might be difficult to do if you’re in a tough financial situation. After all, you likely fell behind because of a lack of resources. And even if you do have the cash to play catch up now, getting back on top of your payments could require more than just coming up with the lump sum to cover them.

Delinquency, Deferment, or Forbearance

If you are more than 90 days late on a federal student loan payment, your loan servicer will report the delinquency to the three major national credit bureaus. This will lower your credit score and could hurt your ability to obtain credit cards or loans in the future.

Credit bureaus may appear as "consumer reporting agencies" on the promissory note you signed before receiving your student loan.

Depending on your situation, you might be able to enter deferment or forbearance. Federal loan programs have specific situations in which you are automatically approved for deferment, which means certain federal loans won’t accrue interest. You can also ask for forbearance, whether you have a private or federal loan. Loans in forbearance accrue interest that you’re responsible to pay. 

You’ll be able to put off making payments for a while in these cases. However, it’s important to carefully look at the terms of deferment and forbearance. In some cases, you might have additional fees added to your loan, need to continue paying interest, or possibly be required to make a reduced payment.

When you have private loans, your choices may be more limited. Some private lenders may take legal action if you don’t pay your student loans. It may be smart to speak with your lender about its hardship programs, and what you can do to get back in good standing.

Enter a Loan Rehabilitation Program

The point at which you’re in default on your loan varies. For William D. Ford Federal Direct Loans and Federal Family Education Loans, you’re considered to be in default after 270 days, or about nine months. When that happens, you are no longer eligible for forbearance or deferment. You have to complete a loan rehabilitation program in order to access other student loan programs, such as income-driven repayment and consolidation.

A federal loan rehabilitation program is one in which you receive a payment plan that requires you to make nine on-time payments in a row. You must complete all nine payments within 10 months and the payments must be within 20 days of the due date every month. The monthly payment amount will be 15% of your annual discretionary income divided by 12. If you can’t afford that payment, you can complete a loan rehabilitation income and expenses form to show your loan provider your earnings. Depending on your circumstances, your provider may be able to offer you a lower monthly payment rate after receiving the form.

After you make these payments, you’re no longer considered to be in default, and you can attempt other methods of making your federal loan payments affordable.

Consolidate Your Federal Loans

Federal loan consolidation can be one way to roll everything into a single payment that might be more manageable. In many cases, a federal loan consolidation lengthens your loan term, leading to a smaller monthly payment. Moving to consolidate before you go into default may help you avoid a damaging financial blow.

You’re not likely to be eligible for an income-driven repayment plan if you’ve defaulted on your student loan. 

As part of your consolidation options, you might be able to qualify for income-driven repayment, which may lower your monthly payment to a more affordable amount. This is one of the best things to do before defaulting on student loans. For example, if you’ve got a low income, you might qualify for one of the income-driven plans with a longer repayment term and lower monthly amount. Once you realize you’re having trouble making your payments, contact your federal loan servicer and talk about your situation. 

Any time you lengthen your loan term, whether it’s through consolidation or income-driven repayment, there’s a good chance that you’ll end up paying more in interest over time.

Refinance Your Private Student Loans

You can avoid defaulting on private student loans by refinancing. While some private lenders offer forbearance or deferment, the reality is that they don’t have the income-driven repayment available with federal loans, so you might not have as many options and protections.

Refinancing can help you get a lower payment on your loan, making it more affordable from a cash-flow standpoint. But, again, a longer-term could mean more money paid in interest.

The main thing to be aware of is that you need good credit in order to refinance private loans. If your credit score has already been affected by missed payments, you might not qualify. A co-signer can help you, though. If you know someone with good credit, they might be willing to co-sign on your student loan refinance, but remember that the co-signer assumes the debt if you fail to repay it.

Making a Deal on Your Student Loan Debt

While you can’t settle out of your student loan debt completely, you may be able to negotiate lower payments. If you can’t make the payments on an income-driven repayment plan, your loan provider may work with you to find an amount that fits your budget. While a repayment plan doesn’t necessarily save you anything extra on your loans, you might be able to negotiate the waiving of some outstanding fees or collection costs.

Additionally, when you default on your loan, your loan provider has the right to garnish your wages by 15%. However, you may be able to avoid that by sending in the late payment within 30 days of the garnishment letter being sent.

Federal loan providers also have the right to withhold money from your income tax refund and other federal payments if you do not pay your student loan every month.

The Bottom Line

Rather than letting your student loans go into default, it may be better to try and avoid default in the first place. 

If you feel like you won’t be able to make your payments, and you have federal loans, call your servicer and ask for deferral, forbearance, or income-driven repayment. These steps can at least provide some temporary relief. As your situation improves, you may be able to get off income-driven repayment and make larger monthly payments to pay it down faster.

For private loans, find out if your lender has a hardship program or offers forbearance. You can also consider refinancing if your credit is good. These options allow you to reach a manageable situation before you default.

The sooner you confront the issue, the more options you will have—and the greater the chance that you’ll avoid defaulting on your student loans.