Defaulting on a student loan is one of the most life-altering mistakes you can make if you don't know the easy steps to recovery. These facts about student loan defaults can understandably make borrowers shiver:
- There are large penalties for going into default, which are added to your loan.
- You're rarely able to declare student loans in bankruptcy.
- Your wages can be garnished and you may be unable to qualify for federal government employment.
These scary details can prevent borrowers from using options they may not know are available such as nine monthly payments as low as $5 to get out default, low monthly payments to avoid it beforehand, and wiping the default from their credit report.
Based on newly compiled data from the National Center for Education Statistics, about 33% of borrowers who began borrowing in the 2003-2004 academic year have defaulted on at least one federal student loan. That's up from 20% of borrowers who started borrowing in the 1995-1996 academic year and defaulted in the first 12 years.
Here's what you need to know to avoid defaulting on your student loans or clean up the mess afterward:
1. Unemployment or underemployment is often the cause, but it's also the cause of being excused or getting reduced payments
Only in 1 in 4 borrowers in both groups maintained full-time jobs. This can be for a variety of reasons, but having a lower income can mean lower payments. The problem is you have to ask your student loan servicer for them. Call your servicer if you are having financial difficulty and ask about income-driven and extended repayment plans.
Your payment on an income-driven repayment plan may be as low as $0. Whatever, you do, don't get discouraged by rumors that there are too many repayment plans to choose from. There are really only two to three. Ask the customer service agent to help you compare Pay as You Earn or Repay as You Earn income-driven repayment plan or extended options.
2. Student loan default is temporary, and your credit report can be cleaned up
You can get the default status of your federal student loan removed from your credit reports with nine one-time payments within a 10-month period. You'll still have late payments on your credit report. You just have to call the guarantor of your loan or the collection agency handling it, which you can find by logging on to studentloans.gov or calling your student loan servicer. The payment you are offered may be as low as $5.
You may get an offer to get a new loan after three months, but you should only do this if you are returning to school immediately and need new loans. You won't do any cleaning up of your credit report this way.
3. Ask for your school's help with career guidance
Remember that college that charged you all that money so you had to borrow those student loans? They have a career services department that helps alumni find work after graduation and even if you have yet to complete your degree. Call them.
The number of individuals with defaults is startling. I know. I had a default in 2002. It's cleared from my credit report and I've written three books on the topic since. We all make mistakes, but this is one of the easy ones to fix.