Ask the Experts

It’s Not My Default

I am ashamed to say I will probably default on my student loan. Is there anything I can do to stop or delay it?

You are not alone in defaulting on a student loan. Reports indicate that almost 11 percent of students are in default this year. The weight of debt is overwhelming, but defaulting will make things worse. A damaged credit score and even deeper debt can be the result, so let us look at your options.

There are a number of precautions to prevent student loan defaults. It is important to know your financial situation and understand what causes things to break down. This will happen if your budget is tight and an unexpected bill appears. If your interest rate or repayment unexpectedly increases, you could be sent into default. Automatic default can also happen if your co-signer has declared bankruptcy or passed away.

If you have missed a payment, there is no need to panic. Federal student loans do not officially go into default until they have been unpaid for 270 days. They will enter delinquency though as soon as you miss a payment. Private student loans are not so lenient and will go into default the moment a payment is missed. If you have the means to make a payment do it, because a default will damage your credit score magnifying your problems.

Application for repayment suspension, deferment, or forbearance can put off payments for a set period. Be aware that forbearance still accrues interest on the loan. Federal student loans or Perkins loans may offer deferment options without interest, but private lenders are unlikely to provide this. Your choices depend on your personal situation, unemployment or economic hardship, with deferment available for up to three years.

If your monthly payments are at least 20 percent of your gross monthly income, you may be eligible for mandatory forbearance of federal student loans. Income-driven repayment plans are a longer term option. They are only available for federal loans and will reduce your repayments to a percentage of your income. You can also qualify for student loan forgiveness after a set number of repayments depending on the plan. You will need to re-apply each year and any loan debt forgiven may be considered as taxable income.

Private student loans usually have fewer options, however lenders are often open to negotiation in times of financial hardship. You also have options to refinance or consolidate. The former involves grouping several loans into one which could offer a reduced interest rate. Refinancing means taking out a second loan, at lower interest, to repay the first one. Both depend on your personal situation.

Defaulting on a student loan can land you in deeper debt and play havoc with your credit score, so prevention is preferable to cure.

Students graduating with high debt encounter difficulties in qualifying for home and automobile loans… Hank Johnson.

Jacob Maslow is the founder and editor of Legal Scoops.