Do you know what happens when you default on your student loans?
If you are not familiar with the word, let me explain. Default occurs when you fail to pay your monthly loan payment.
If you are in debt, you know that particular time of the month that your payment comes due. For me, it was the 15th of the month. I always made sure to have enough money in the account on that day.
It is easy for things to get lost in the shuffle
However, there were a couple of times where I cut it close. I have multiple bank accounts. My paycheck flows through one. My rent comes out of another. And so on. I find myself constantly transferring money back and forth.
One time I got my days mixed up. It was the day of my loan payment and I did not have enough cash in the account to cover the automatic withdrawal. In order to pay my loans on time, I literally had to go to the ATM of one bank, get the cash and deposit the cash in the other bank (all before 9 am).
The beauty of working in Manhattan where there is a bank on every corner!
If the loan company initiated an external withdrawal before my deposit hit the account, I would be classified as a delinquent payer.
Delinquent first, then Default
Before missing a payment, you are classified as “in good standing”. The instant you miss a payment your status changes to “delinquent”. Unfortunately, for most loans, there isn’t a grace period at all.
Let’s say that you are a day late on your payment, no big deal. But what if that day turns into weeks and months, then things get serious.
After 90 days, your delinquent status gets reported to the three credit bureaus.
Then after 270 days past due, you moved to default status.
So you may be thinking: I will never be in that situation. Honestly, you never know. Bills pile up. The rent is due. Other things start taking priority, while loan payments are placed on the backburner.
Here is what to expect if you are in default
Loss for forgiveness plans
For those who work in the public sector and there are many loan forgiveness options available. The catch here is that you have to work in the sector for a significant amount of time (8 to 10 years), and you have to consistently be in good standing with your loan payments. Once default happens, all of that work and time goes down the drain. Default means potentially losing the loan forgiveness, which could be devastating financially.
Lowered credit score
The default will definitely lead to a lower credit score. Once the three bureaus are notified about the bad standing, it will immediately lead to a reduction in one’s credit score. As you know, a lowered credit score will impact your ability to get loans or mortgage in the future.
Once you are in default, your creditor will transfer your account to a collection agency. Collectors specialize getting money owed, as a result, there is an additional fee attached to this service. You will have to pay the fee.
Dealing with collectors can be a horrible experience. They will call, email, mail and some even threaten folks in order to collect on what is owed. Your life will be more peaceful if you avoid having to deal with them.
Tax refund offset
Most of us get a tax refund each spring. Well, if you are in default, that tax refund will be taken before it even hits your account. This one hurts. Especially, if you typically use your tax refund for paying off other debt or increasing your savings.
The financial definition of “garnishment” is when there is a court order directing wages to be seized in order to pay an overdue debt. In other words, default could mean that a percentage your paycheck will go straight to your creditor. If you are living above or even at your means, garnishment could mean financial disaster. No more brunch avocado toast for you.
Your creditor could sue you. Enough said.
Higher interest rates
High-interest rates is a definite for future loans you secure. I have talked about the colossal impact of interest on paying off debt here.
A Hold on College Transcripts
This was new to me. Colleges will actually hold your transcripts if you are in default with your student loan creditors. This is important because many jobs request you provide proof of academic credentials. The only way to do that is to provide your college transcript. No transcript, no proof. No proof, no job.
Lead to “Acceleration”
“Acceleration” means that the entirety of your loan balance is due, immediately. This is probably the worst out of all the consequences. Obviously, if you couldn’t afford to pay your loan payments, how could you pay the entire balance?
If you don’t know, now you know
Defaulting could happen to anyone. If you have any debt, I suggest you take it seriously. While life is unpredictable, being aware the consequences will stop procrastination in its tracks.
One of my favorite websites and that I recommend people to is Student Loan Hero.
The founder is Andrew Josuweit. In 2009, he graduated from college and was $70K in student loan debt with no job. He had a combo of federal and private loans. The federal loans he put into deferment, but the private loans did not have that option. He found himself with $400 monthly payment that he had to deal with. The number of loans under his name totaled to 16, many of them from different providers. To increase his ability to pay, Andrew relocated to Southeast Asia to reduce his cost of living. Things were looking up.
Andrew talks about what happens next:
“Then my deferral expired. I couldn’t even cover the interest, so my loan balances kept increasing. And then I started getting calls from a collection agency, claiming I’d defaulted on two loans. I had 16 student loans from three servicers, and I eventually figured out that I’d forgotten to give one of them my new number and email.”
Josuweit enrolled in a debt rehabilitation program to help him get back on his feet. The program required him to make 9 consecutive payments in order to erase the default from his record. Eventually, he got his loans down to 6 (From 16). And through Student Loan Hero, he helps others get back on track as well.
Debt doesn’t have to have the last word. There are ways forward. Look out for more posts in the future regarding debt and what we can do.