Defaulting on Student Loans – Consequences & How to Avoid It

If you’re reading this article, Defaulting on Student Loans – Consequences & How to Avoid it, then chances are that you are running into some challenges in making your monthly student loan payments and are looking for a way to remain in good standing while managing your payments in a manner that works with your particular financial circumstances.

Am I right – ish??? If so, you’re in a good place and Daddy Poorbucks is going to try to help you get going in the right direction. I mean really… like nobody wants to be in a tough financial situation but life can be complicated and sh-t happens. I know. Shizzo’s happened to me too and I’ve had to dig myself out of financial holes on more than one occasion so I feel your pain.

Just know that the fact that you are actively looking to resolve the matter, and remain in good financial standing, is a huge deal. Many people just walk away and give up… but with federal student loans you can’t really just walk away by defaulting on them. They’re like Super-Debts that stay with you. Like Taxes, like child support, like alimony – Super-Debts just don’t go quietly into the night. These fuckers are joined at your hip so we need to work with that constraint in mind. This article will also address private student loan default help as well but the consequences are different, to a degree, so let’s get to it.

Know Your Loans – We’re Talking Federal Student Loans, Y’all

There are 2 categories of student loans: Federal Student Loans & Private Student Loans. When you apply for school loans, you always apply for federal student loans first because they have many benefits down the road, such as loan forgiveness and income-driven monthly payments. These loans are backed by the federal government.

Private student loans are secondary and what you use to fill in for the shortfall between your federal loan amount and the amount you actually need as most times federal loans will not be enough to cover your funding needs for school. Private student loans are just that – loans from private banks. Here at Loan Camel, we assist student with finding lenders for Private Student Loans as well as with Student Loan Refinancing, the latter of which we will get to in a bit. Private student loans are similar to other debts you may have, such as credit cards, where there isn’t an asset being held as collateral though there may be a co-signer on the hook.

The Federal student loan distinction, aside from the benefits I previously mentioned of loan forgiveness and income-driven payments, is recourse. If you default on your private student loans, it will mess up your credit scores. If you default on a federal student loan, it will mess up your credit scores… and mess with your life financial life because it won’t go away. It can even survive bankruptcy like taxes, alimony and child support. That’s why I call it a Super-Debt. And before we get to what can happen with default, we need to understand how it starts.

Before Default Comes Delinquency

This is a little different but I’ve been called a delinquent before in my youth and I was literally pulled out of public school after 10th grade and sent to a private school filled with spoiled rich kids as my parents were afraid that I was going down a path to nowhere… Somehow I ended up a lawyer.

And yes… I hold a soft spot in my heart for people who get knocked off path in life and get their sh-t together and take responsibility. And yes… I hold a soft spot in my heart for people who had no advantages and did what they good, in spite of odds stacked against them, for whatever reasons. No judgment here from me, you’re better than me and you can do better than me.

I’ve been down-and-out and came back – it’s in my “About Us” page – see for yourself. I was divorce broke with good credit and a perfect payment history and tanked my credit with a Chapter 13 bankruptcy when personal loans could have resolved the issue. I didn’t know better. Now I know better. Today I see credit scores in the 800’s but it was humbling and it was a lot of effort to pull myself out.

Delinquency is the start of going off that path when it comes to student loans and non-payment. Per the U.S. Department of Education’s Federal Student Aid Office, the 1st day after you miss a loan payment due date you are delinquent on your loan. After 90 days of delinquency, the matter is reported to the 3 major credit bureaus… and your credit score starts taking a pounding.

If your loan continues in delinquency, for the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, you will be in default at 270 days of delinquency. With a Federal Perkins Loan, you are considered to be in default as soon as you miss a scheduled loan payment – Yikes! They all vary, as do private student loans and what constitutes default with each private lender.

The Consequences of Defaulting on Your Federal Student Loans

While default on your private student loans will mess up your credit score, when we are talking about defaulting on federal student loans, the consequences are that “And Then Some” as I call it because these loans are part of the “Super-Debts” like alimony, child support and taxes which I’ve mentioned previously… They don’t just go away.

Defaulting on federal student loan consequences are numerous starting with forfeiture of any loan forgiveness programs and income-driven payment programs which you are ordinarily able to access with federal student loans. But it gets even more fun than that:

Wage garnishment, withholding tax refunds, withholding of school transcripts, garnishment on federal benefits, in addition to the ordinary and simple destruction of your credit where loans for cars, homes, apartment leases, the ability to get credit and credit cards and no so nice remarks on your credit report which could also impact employment – The whole bowl of rotten guacamole. And that will definitely make anyone sick. If you want to avoid this, let’s stay on track or get back on track with a few alternatives.

Stay on Track… or Get Back on Track – Meet the Alternatives

If you are dealing with federal student loans, you will likely want to keep the loan forgiveness and income-driven payment options that come with those loans, which means that you would not want to do a private student loan refinancing. Assuming that, you want to work through the federal channels provided through the U.S. Department of Education.

Per the U.S. Department of Education’s Federal Student Aid Office, here is who you will need to contact if you are having trouble with your federal student loan payments:

• For the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, you will want to contact your Loan Servicer, a list of whom can be found here.
• For the Federal Perkins Loan Program, contact the school where you received the loan for details. If you know that your Perkins Loan has been assigned to the U.S. Department of Education, contact the ECSI Federal Perkins Loan Servicer.
• If you are not certain as to who your loan servicer is, then you want to call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243.

If you are dealing with private student loans, Loan Camel uses a matching system made up of Credit Unions and Community Banks that offer some of the best rates out there. You can see your potential rates without impact to credit here on our Student Loan Refinancing page here. We also can include federal student loans but keep in mind that certain benefits are forfeited.

You can literally lower your rate, stretch out your payment and cut you monthly payment amount significantly – like close to half or more, depending. You can see a more detailed explanation of how that works in my article entitled Help Paying Student Loan Debt – Lowering Your Monthly Payment to Meet Your Budget’s Needs.

Now You’re Ready – Go Get Em!

Whatever you do – do something! Be proactive, don’t let it go, don’t ignore it. Approaching your lenders for assistance is the best thing you can do in order to stay out of delinquency and/or default. You can work out options for income-driven payments on the federal student loan side and you can do student loan refinancing on your private student loans.

Daddy Poorbucks and the Camel have provided you with contacts on the federal student loans side as well as a means of checking out some of the best rates here through Loan Camel’s Student Loan Refinancing page – and without impacting your credit scores. You can then easily apply for a loan that works for you, all through local community banks and credit unions.

And as always, the Camel and I are here for you. If you have any questions or comments, please feel free to leave them in the space provided below. You got this!