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Defaulting on Student Loans

We’ve all been there; you’re struggling with your budget and trying to figure out your bills. You might have fallen behind on some of your payments when balancing what bills you can pay for that month. You’ve had friends and family already lecture you on "living within your means" or "not spending more than you have." While they lecture on life, we’ll take a look at one part of your budget; your student loans, and the facts about what happens if you get too far behind on paying those back.

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The Facts About Paying Back Student Loans

The fact is that you do have student loans. They are an option that many students take advantage of and have to face repayment when the time comes. The time comes for most students 6 months after your last day of attending school. Notice how it’s not "6 months from your graduation"? That’s because you are still responsible for the loans that you accumulated while you were in school, even if you don’t graduate. If you only went for 3 semesters, that’s 3 semesters of tuition that your school charged you. If you used student loans to pay for those 3 semesters, you have to repay those loans.

You are also responsible for paying back on those loans even if you were not satisfied with your major or the school that you attended. Just like in the example above, the lender was paying for those 3 semesters of tuition. It’s not the lender’s fault that you decided you no longer wanted to be an archeologist and now want to be a teacher. Since they haven’t invented a way to erase what you learned during those semesters, there are no refunds.

Remember, missing one payment will not throw you into default. It’s not good, especially if you accrue late fees, but it’s not the end of the world. For most student loans from the federal government you have to miss 9 months of payments before you’re loans go into default. If you took out private student loans, check with your lender on how many months you are allowed to miss before going into default. Most lenders will give you PLENTY of warning that you are late on payments and if you are getting close to default.

The Bad Facts – Defaulting

Let’s talk about the bad facts of going into default for a moment. Think of this scare tactics to keep you on the straight and narrow!

First, once your loans go into default, you can’t get any new financial aid. If you want to go back to school and are planning on using grants or loans, it’s not going to happen until you clear yourself from default.

Second, they can (and most likely will) garnish your wages. This is not a pleasant thought, especially if you are already on a shoe-string budget. Nothing is worse than getting a paycheck that you already have spent, only to find that it is smaller than you planned! While your first reaction may be to blame your job for allowing this to happen, know that they are required by law to adjust your paycheck.

Third, they can (and most likely will) garnish your tax returns. Just like your paycheck, if you had plans for your tax return money and then find out that you are not getting as much as you planned; if anything at all, this can be bad for your budget. Once they start taking money from your tax return, they will continue to do so for each consecutive year until the loan has been paid.

Finally, your student loans are typically not allowed to be discharged through bankruptcy, so if you are thinking that might be an option, think again! The money the federal government gave you to pay for school has to be paid back and getting it included in a bankruptcy is pretty difficult.

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The Good Facts

Just like a flashlight in the dark, here are the good facts that will give you some comfort. There are many options available to you if you can’t make your monthly payments. Deferment options allow you to postpone making payments and stop interest from accruing on your subsidized student loans. Forbearance options allow for you to postpone making payments but still have interest accruing (but often you can make the small payments on the interest to help offset these accruements).

Finally, there are income-based and income-contingent repayment plan options which calculate your yearly income and adjust your payments accordingly. These options are all available to you as long as you call before your loans go into default. There is really no excuse if you can’t find time to call your lender and take advantage of these options in the 9 months before you go into default.

If you are already in default, there are still some options available. You may be able to consolidate your loans to get them out of default. There is also the option of rehabilitation. While the wording is kind of silly, it’s an excellent option for people who truly want to get out of default. You first make a set number of consecutive monthly payments. Once you have made those set number of consecutive payments, you then go back into your traditional student loan repayment, and the default is cleared! With the default cleared you avoid wage garnishments, tax garnishments and are eligible for financial aid again.  

Facing money problems is never fun, but if you don’t avoid it and take advantage of the different options that you have, it can make the problem seem less overwhelming. Once you call your lender and know what you have available, the biggest battle is over.

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