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How Student Loans Work

Defaulting on a Student Loan

stressed college student
The worst thing you can do is stop paying on your student loans. That will have negative effects on your credit. So reach out to your lender and work out some kind of payment plan. Carol Yepes/Getty Images

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The Department of Education defines student loan default in different ways depending on the type of loan. Once a loan payment is a day late, the loan is considered delinquent. After 90 days, your delinquency will be reported to the three credit bureaus. With direct loans and those made under the FFEL program, a borrower who does not make a scheduled payment for at least 270 days will be considered in default. Borrowers in default look forward to harassing phone calls, years of low credit scores and even garnished wages.

This is why it's never a good idea to default on your student loans. Once you've chosen a repayment type, it's easy to repay a student loan. Each month following the three- or six-month grace period after graduation, you'll receive a bill in the mail or by email. Lenders and servicers offer direct withdrawal from your bank account; no check or stamp necessary.

It's simple enough, yet sometimes it's not quite as easy as that. Jobs fall through, layoffs happen, economies tank and bills pile up. While it can be tempting to simply stop sending in those monthly payments, look into ways your lender may allow you to change the terms of your loan repayment.

Some private lenders and the federal government offer forbearances, periods where repayment of your loan may be suspended without penalty. The interest will continue to accrue, but you may be eligible to get a few months up to a couple of years off while you get your finances in order.

If you're swimming in student loans from several sources, you can consolidate them into one monthly payment. The federal government allows federal loans to be consolidated, or you can refinance private loans with a commercial lender. You can also combine private and federal loans into a private-lender refinance. There are pros and cons to each of the scenarios, so make sure you understand what you are gaining and losing. It may help to seek advice from an outside source like the nonprofit National Foundation for Credit Counseling (NFCC) or a financial planner.

If you've defaulted on your federal student loans, you can also opt to rehabilitate your accounts. This is simply making payments again. Don't worry that the payments will be the same ones that you could not afford in the first place. During rehabilitation, your loan holder will determine a new payment for you based on your discretionary income. After nine payments made on time over 10 months, you will be considered current once more, and the default status will be removed from reports to credit bureaus. Note that federal student loan rehabilitation is a one-time opportunity.

Understanding student loans, repayment, defaulting, consolidation, refinancing and forgiveness takes effort, but it's necessary if you are considering borrowing or have already done so.

"The student loan landscape can be very confusing," says Coleman from NFCC. Considering the sweeping changes in federal student loans during the past decade and the contested nature of the topic today, it's not going to get any easier. When it comes to student loans, each borrower must look out for themselves.

How did we get here? In just 10 years, the federal student loan debt grew from a mild $750 billion to the current figure. The number of borrowers expanded too, but not in the manner of the debt. In 2010, the federal government started lending directly to borrowers rather than having banks lend money that the government guaranteed. Under the "direct loan" program, all federal student loans now come through the Department of Education, which accounts for much of the drastic jump in debt, according to Student Loan Hero.

Last editorial update on Feb 21, 2020 03:57:18 pm.

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Sources

  • Bacon, Natalie. "5 Private Student Loans That Offer a Grace Period." Magnify Money. May 22, 2019. https://www.magnifymoney.com/blog/college-students-and-recent-grads/6-private-student-loans-offer-grace-period356053737/
  • Coleman, Barry. Personal interview. Vice President, Counseling and Education Programs, National Foundation for Credit Counseling (NFCC).
  • College Board. "Trends in Student Aid 2019." https://research.collegeboard.org/pdf/trends-student-aid-2019-full-report.pdf
  • Cooper, Preston. "Denied For Public Service Loan Forgiveness? Here's Why." Nov. 21, 2019. https://www.forbes.com/sites/prestoncooper2/2019/11/21/denied-for-public-service-loan-forgiveness-heres-why/#3b7f641528c6
  • Federal Student Aid. "How much can I borrow?" U.S. Department of Education. https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized#how-much
  • Federal Student Aid. "Repaying Your Loans." U.S. Department of Education. https://studentaid.gov/sites/default/files/repaying-your-loans.pdf
  • Federal Student Aid. "What types of federal student loans are available?" U.S. Department of Education. https://studentaid.gov/understand-aid/types/loans
  • Federal Student Aid. "What's the difference between Direct Subsidized Loans and Direct Unsubsidized Loans?" U.S. Department of Education. https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized#subsidized-vs-unsubsidized
  • Hornsby, Travis. Personal interview, Student Loan Planner.
  • IRS. "Topic No. 456 Student Loan Interest Deduction." https://www.irs.gov/taxtopics/tc456
  • Luthi, Ben. "3 Ways to Get a Lower Student Loan Interest Rate." Student Loan Hero. Dec. 23, 2019. https://studentloanhero.com/featured/how-to-lower-student-loan-interest-rate/
  • Pentis, Andrew. Personal interview, Student Loan Hero
  • Powell, Farran Powell and Kerr, Emma. "See the Average College Tuition in 2019-2020." U.S. News & World Report. Sept. 9, 2019. https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic
  • Student Loan Planner. "12 Best Student Loan Refinance Companies in 2020 (With a $100-$775 Bonus)." Feb. 17, 2020 https://www.studentloanplanner.com/refinance-student-loans/

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