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Dealing with student loan default and delinquency

When you have not paid your monthly loan repayment for more than six months, you are either delinquent or in default.

Take Action Before Being Delinquent or In Default

There are many ways you can avoid being delinquent or being in default in the first place. It’s always best to avoid default and delinquent loans whenever you can, because negative records will stay on your credit reports.

  1. If you know that you cannot pay for your loans – because you will go back to school, be on military duty – contact the lender ASAP to get loan deferment or forbearance.
  2. Also, you may not have to repay your loan yet, if you just graduated or go to graduate school. Read more about this topic in the grace period section.
  3. Adjust your monthly payments so that it is affordable. Apply for IBR, ICR, and other repayment plans.
  4. Borrow responsibly. Default rates tend to increase with over-borrowing. A good rule of thumb: if your total debt after college will be more than twice your expected starting salary, you are borrowing too much.

Being Delinquent or in Default for Federal Loans

Both delinquent and defaulted loans result from missed payments. But they have different consequences and definitions.

What happens when you are delinquent

The following are the things that happen when you are delinquent:

  • If you missed any of your loan repayments, you are delinquent.
  • The delinquency begins on the first day after you miss a payment.
  • During the first 15 days of delinquency, your lender must send you at least one written notice or collection letter. They must also tell you that there is the Federal Student Aid Ombudsman Group to help you resolve a federal student aid dispute.
  • The longer you stay in delinquency, the more notifications you will get.
  • When your delinquency goes on for 9 months, your loan holder declares you in default.

What to do when you are delinquent

Talk directly to your lender BEFORE you default to go over the options that you have, such as asking for forbearance or deferment or changing your repayment plan. Considering your options sooner than later will not only preserve your sanity, but also your credit score, paycheck, and future financial aid.

What happens when you are in default

If you fail to make monthly payments for 9 months (270days), you are in default. (If you pay less frequently, the delinquency period may be extended to up to 330 days.) Once you default, the entire loan balance becomes due.

The following are some of the consequence of defaulted loans:

  • Being reported to a credit collection agency and credit bureau
  • Garnished (withheld) paychecks
  • Paying collection costs added to the outstanding loan
  • Being taken to court
  • Becoming ineligible for further federal student aid
  • Becoming ineligible for any type of deferment or forbearance
  • Not getting income tax refund

Keep in mind that most student loans are not discharged or canceled under bankruptcy.

What to do when you are in default

  • Contact the lender and explain your situation fully.
  • Ask what options are available to you to resolve the problem, and let them know that you are willing to repay.
  • Do not ignore notices from the lender. Always stay in touch to avoid bigger trouble.

If you think the default is an error

If you know you are eligible for loan deferment or forbearance, and think that the default is an error, contact the lender and explain your situation.

If you have been making payments but they were not credited to your account, ask the loan servicer for a statement that shows your payment history.

Being Delinquent or in Default for Private Loans

For private loans, you do not have the 9 month period of delinquency before being in default. As soon as you miss a payment, your loan goes into default. Detailed policy and default period will be described in your loan contract.

In addition, you have fewer options for getting out of default.

Getting Out of Default

There are several things you can do if you are already in default.

Rehabilitation Programs

Participate in rehabilitation programs that help borrowers get out of debt. With these programs, you can reverse many of the negative consequences of defaulting on a student loan.

Once you participate, you have to make at least 9 qualifying, on-time student loan payments. If you miss any payments, you have to begin the repayment schedule from the beginning.

If you complete the repayment schedule, the guarantor transfers the loan to a lender and servicer. The, the loan is considered to be out of default and back into repayment.

When you successfully complete these rehabilitation steps, you become eligible for financial aid once again, and any of the negative consequences of having defaulted loans will cease.

Read more about the specifics of Loan Rehabilitation Programs.

Get Professional Advice

If you are in severe economic hardship, and you know that even with a rehabilitation program you will not be able to pay your future loan payments (i.e. if you are permanently disabled), seek the advice of certified financial advisors and lawyers specializing in bankruptcy.

Student loans are not automatically discharged with bankruptcy, but by following special procedures you can get it discharged.

How to Get a Student Loan Discharged in Bankruptcy

Student loans are not automatically discharged with bankruptcy. You have to prove that repaying the loan would be a severe hardship for you, by submitting appropriate forms and documents to the court, such as

  • Documentation on income and expenses
  • How long your financial problems are likely to continue
  • How hard you have tried to repay your debt

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