Loans 101: How to Avoid Defaulting on Student Loans In these hard times, more students are defaulting on student loans. Arm yourself with information on how to prevent yourself from falling into the same trap and avoid defaulting on student loans.by Sandy Bloom
Not many Americans graduate without having some sort of debt owed for their education.
It’s a tough reality, especially considering that loans don’t disappear if you fail to graduate, don’t get a job, or don’t like your school. If you borrowed money for your education, regardless of the outcome, you owe it back.
The good news is you are not alone. Nearly 90 percent of students who applied for federal student aid are paying off student loans after graduation.
That’s why it’s so important for all students, including those obtaining online degrees, to understand the consequences of defaulting on student loans. If you do not make any payments to your federal student loans for 270 to 360 days (depending on your loan) without making any special arrangements with your lender, your loans are considered to be in default.
Defaulting student loans is a very serious situation, especially considering you cannot declare bankruptcy to avoid paying off these loans. In fact, if you fall behind on student loan repayments, the government can:
- Intercept any income tax refund you may be entitled to until you pay off your student loans
- Take (“garnish”) a portion of your wages – up to 15 percent of your disposable income
- Take away some federal benefit payments, such as Social Security retirement and disability benefits to go toward your loans
- Sue you
- Prevent you from renewing a professional license you already hold
Not to mention, you will begin to receive a low credit score and will have trouble taking a loan out in the future or even obtaining a credit card. A poor credit record could also prevent you from being hired.
Unfortunately, in these hard economic times, more and more students have defaulted on their student loan payments. According to the Wall Street Journal, default rates for federally guaranteed student loans reached 6.9 percent for fiscal year 2007 – the highest rate since 1998. It’s the same story for small private student loans, too.
Knowing the increasing rate of defaulted student loans, it’s important all students get familiar with how to avoid defaulting on student loans. Just because it can happen, doesn’t mean it has to happen to you.
Here are some tips on how to avoid default and how to pay off your student loans:
- Borrow only what you need. Overborrowing increases default rates. When you are in school, don’t lead a luxurious lifestyle. Live like a student while in school so when you graduate, you don’t have to anymore.
- Keep a list of all your loans. Include on the list the contact information of the lender, the type and amount of the loan, the interest rate, and the due dates.
- Always make your payments on time.
- Keep your lender(s) updated on your whereabouts. Make sure to tell them if you moved, when you graduated, if you changed your name, if you transferred schools, etc.
- Try to consolidate all your loans. Combining all your educational loans into one big loan allows you to send payments to just one lender and makes adjustments to your monthly payments much easier.
- Keep all records and documents regarding your loan payments. These records, including copies of letters, canceled checks, promissory notes, and notices of disbursements belong in one file folder. Make sure to write down dates on each document (when mailed or when received) and keep a spreadsheet of your personal finances.
- Before you go into default, talk to your lender. Once you have already defaulted on your loans, it’s too late to ask for forbearance or deferment. Most types of federal loans qualify for forbearance, which allows the borrower to suspend payments temporarily, though he/she will still be liable to pay the full loan plus the interest that builds while the loan payments are on hold. Some need-based loans qualify for deferment, which is when the government covers the interest payments for a set period of time. Both forbearances and deferments can be used for up to three years per loan. Note, some private loans may also offer forbearances or work with you to develop an alternate repayment plan.
- Get informed. Before you default, research your options. The U.S. Department of Education Debt Collection Service publishes the “Guide to Defaulted Student Loans” to help students repay their defaulted student loans. Other helpful links include: