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Debt Basics

Student Loan Default

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student loan default shipwrecked

The most common question we get from young people with student loan debt is:

“What will happen if I ignore my student loans?”

If you only get one message from our site, puh-leease make it this:

DO NOT IGNORE YOUR STUDENT LOANS!

Ignoring your student loans will enact a chain of events that can quickly snowball into an irreversible financial disaster we call student loan default. It should be avoided at all costs.

Missing One Payment

Missing one payment results in a late fee. The size of the fee depends on your lender’s policy. Your lender will contact you to see what’s up and to inform you of the penalty. The rep discusses options that might be available to you, such as deferment, forbearance, Income Based Repayment, changing your payment schedule, consolidation, etc.

A Few Missed Payments

Late fees are starting to pile up. You’re getting phone calls and emails from your lender urging you to consider your options and warning you of the perils of student loan default.

270 Days Later …

You fail to make a payment for 270 days. You have reached the bad place: student loan default.

Your account goes into collections. You no longer are considered in repayment and owe the entire balance immediately. Interest continues to accrue, and what’s worse: most lenders have a policy of doubling or even tripling a borrower’s interest rate if they go into default. The amount you owe balloons dramatically. 

Student loan default entails a laundry list of heinous repercussions. This list comes straight from the web site of the guarantor of one of my loans, Great Lakes. You can view the original page here.

What Happens If You Default (Don't Pay)?

Defaulting on your federal student loans (failing to make a payment for 270 days) has serious consequences. If you default:

•    It will be reported to credit bureaus, making it harder to get a loan for a car or a home.
•    Your federal income tax refund can be intercepted and applied to your loans.
•    A portion of your wages can be held by your employer and applied to your loans.
•    You'll be ineligible for deferments and forbearances, as well as future financial aid.
•    You might receive calls from collection agencies at home or work and you'll be assessed significant collection fees.
•    If you have a professional license from a state agency, it may not be renewed.
•    Your school may withhold services such as official transcripts or letters of recommendation.
•    The federal government may pursue litigation against you.

These consequences are no joke. If you’re still not convinced that ignoring your student loans is the absolute worst way to deal with your college debt, go here.. Click on any state and read the user submitted accounts of what happens if you go into default. 

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Grin and Forbear It: The Ins and Outs of Student Loan Forbearance

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Student Loan Forbearance - BsinDebt

Student loan forbearance is a suspension of student loan payments that is granted to the borrower because of an unforeseen hardship.
 
It is granted by the lender and lasts for a specified period of time, generally up to one calendar year. 
 
If your lender grants you forbearance you are not required to make payments during your forbearance term but don’t forget … INTEREST ALWAYS ACCRUES DURING STUDENT LOAN FORBEARANCE!

If you don’t make payments that interest will accumulate and be capitalized periodically, causing your principle balance to increase. 
 
What is a Hardship?

A hardship is some unexpected event or problem which makes you unable to make regular payments.

Some examples of hardships:

•    You sustain a serious injury
•    You or your spouse/child becomes seriously ill
•    You lose your job and are unable to find a replacement, or are unable to find a job following graduation

Applying for Student Loan Forbearance

Note: Before you apply for forbearance, make sure you explore your options.  There might be better choices available to you, such as deferment, restructuring your repayment term, or consolidation.

Student loan forbearance is obtained by applying for it with your lender.  In most cases the initial application can be completed online or over the phone. 

After reviewing your application, your lender will make a decision on whether to grant you forbearance and then inform you of whether or not you qualified.  If you do qualify, how many months of forbearance you have been granted, effective immediately.

Your lender is NOT REQUIRED to grant you forbearance, but most lenders are willing to work with borrowers who are in good standing.

Prove It!

Be prepared to offer proof of your hardship. 

Pay stubs, medical bills, doctor’s notes, and the like are all in play here. 

Unlike deferment, forbearance is subjective and is granted on a case by case basis, so any materials you have to help demonstrate your hardship to your lender could be helpful. 

I’ve Been Granted Student Loan Forbearance.  Now What?

Breathe a sigh of relief!  You have been given the gift of time. 

It’s time to focus on making it through this hardship. 

If you’re sick or injured, you can focus on getting well without having the stress of impending default.

If you’re looking for a job, your job search is your new job, until you replace that with a “real” job.  Pound the pavement!

Circle the date your forbearance concludes on the calendar and resolve to do everything in your power to be ready to make monthly payments when that day rolls around.

I Was Denied Forbearance!  WTF?!

It is very rare for a borrower who has truly experienced an undue hardship to be denied student loan forbearance.   If you feel your lender’s decision is a mistake, by all means reapply and if you can obtain any additional documents to prove your situation is worthy of forbearance, definitely get them to your lender. 

If there is no hope for a lender 180, it’s time to start thinking about some serious measures to avoid default, because things are not looking good. 

Your only recourse may be to consolidate in order to secure lower payments, and then do your best to make them on time. 

If you absolutely cannot make any payments, then be sure to stay in touch with your lender (even if they refuse to say anything new) and document all phone calls, emails, etc.  Also continue to save all relevant documents that pertain to your hardship, which might come in handy if your lender decides to sue you for wage garnishment. 

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