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What happens if you default on a student loan depends on a variety of factors. Public and private loans are very different beasts. Your payment options and how you can deal with falling behind are different depending on who is backing your student loan.
In response to the COVID-19 coronavirus pandemic, the US Department of Education has announced that all federally held student loans will automatically set their interest rates to 0% for at least 60 days, as of March 20, 2020. The department has also authorized an automatic suspension of payments for any borrower more than 31 days delinquent as of March 13, 2020. Private student loans are not covered by this announcement.
To get the most worrisome question out of the way—no, not paying your student loans doesn’t mean you’ll be arrested. But don’t take our word for it: The US Department of Education says so.
That being said, defaulting on student loans can lead to a collections process. Collections can sometimes involve the courts and legal proceedings. Failing to comply with such proceedings, such as not showing up to court, can get you arrested. That’s called contempt of court.
So, if you do default on your loan, you can’t just ignore it after the fact. Which is why it’s important to understand what happens when you default on a student loan so you can take appropriate actions.
If you’ve defaulted on your student loan, that means you’ve failed to repay your loans as agreed. That could involve several things:
The consequences—and what you can do about them—vary depending on the loan type.
Typically, federal student loans come with larger grace periods and more flexible options for repayments than private student loans. The government actually offers a number of programs to help keep people from going into default in the first place, as well as options to correct a default. It also takes longer to default on a federal loan.
It’s important to understand the terms delinquent and default. Delinquency occurs whenever you fall behind on payments. As soon as you are a day or more behind on a payment, you are delinquent. You remain delinquent until you pay. If the loan provider reports to the credit bureaus, they could report your late payment. That can have a negative impact on your credit score.
Default occurs after a period of delinquency that has not been addressed with payment. According to the Consumer Financial Protection Bureau, private student loans are considered in default if you miss three monthly payments. The Federal Student Aid office notes that federally backed loans are considered in default if you’ve missed your scheduled payments for 270 days or more—that’s around 9 months.
Private student loans are typically governed by the same laws that other private loans are governed by. That means the lender must follow the Fair Debt Collection Practices Act in attempting to recover the funds. They usually cannot collect from you in ways that include garnishing your wages or levying a bank account without filing a lawsuit and going through the courts.
Whether or not the creditor goes to court to force you to make payments, you still owe the money. Defaulting on your private student loans and failing to do anything about it can have some serious consequences, including:
Defaulting on a federal student loan can come with even heftier consequences. This is in part because the government provides so many options for paying back student loans that it sees default as an extremely serious issue.
Before you default on a student loan, you have options such as deferment and forbearance, which allow you to put off your loan payments legally. You can also apply for different loan repayment options that are right for your income. Plus, you have that nine-month grace period to figure out how to catch up before the government considers you in default.
Once you’re in default, though, you lose all of the benefits that come with your federal loans. That includes deferment, forbearance, options for repayment plans, future federal student aid and eligibility for loan forgiveness programs.
If you default on federal student loans, you’re not automatically out all those benefits forever. You might be able to reclaim some of those benefits by correcting the default via loan rehabilitation or loan consolidation.
If you don’t take action to repair your default, though, you could experience other consequences. Lenders of federally backed loans don’t have to go through the courts before taking action, either. They can:
In some cases, schools might hold records, including academic transcripts, if someone has defaulted on federal student loans. This can make it harder for you to get a job or seek continued education.
A Note on Loan Servicers: Your federal student loan was assigned to a loan servicer, which handles your payment options and will help you with any issues you experience. The Department of Education itself does not handle these, and you should never pay another organization to “help” you with your federal loans—your loan servicer will help you for free. Your loan may be transferred from one servicer to another, but every servicer owned by the Department of Education is subject to the same rules and regulations. Some federal loans are owned by commercial lenders or other lenders, so make sure you understand the terms when you apply.
How you correct a default on a private student loan depends heavily on the lender. You should contact them as soon as possible to find out whether they will accept a new payment arrangement. In some cases, if you can cure the default, the lender might agree to allow you to keep making normal monthly payments in the future.
Private education loans are subject to statutes of limitations, meaning there’s a point at which it’s illegal for a lender or collector to sue you over an unpaid debt. You still owe the money, but you can no longer be sued over it. Here’s a list of statutes of limitations by state.
Federal student loan borrows have three options for getting out of default.
As you can see, getting out of default can be a tedious process regardless of which type of loan you have. And allowing the default to move forward by doing nothing can cause serious financial consequences. It’s much better to avoid default altogether if possible. Here are some tips for doing so.
Bottom line: Avoid default if you can. As soon as you think you might have trouble making student loan payments, contact your student loan servicer about your options for making those payments more affordable. And remember, student loan repayment has a significant impact on your credit standing—and various aspects of your day-to-day life—so you’ll want to stay on top of it.
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