Accumulating debt can be a good thing as successful debt management can help bring up your credit score. On the other hand, debt can also be very stressful. To help avoid stress when you are taking out loans follow these tips:
Communicate with Your Lender
Whenever anything changes about your life that may affect your loan, make sure you notify your lender right away. For instance, if you’re moving, let them know your new address or if you have graduated college. Likewise, let your lender know if you have dropped out of school or plan on transferring to a different school. It is vitally important to let your lender know anything and everything that may affect your ability to repay your loan. It would be really unfortunate if you went into default because you didn't receive your bill!
Consider Deferment or a Forbearance
One way to avoid default is to apply for student loan deferment or forbearance. This helps to postpone your loan payments until you can afford to do so once again. However, you will need to plan a bit ahead. While you are still making payments, ask about deferment. I know it can be hard to foresee circumstances that could prevent you from making timely payments, but as soon as you know something will interfere, let your lender know. That way, they can do their best to help you come up with an alternative repayment plan.
Make Special Arrangements If You Can
If deferment is not an option or if you can afford to make payments but just not in the same amount as before, talk to your lender about different repayment options such as income sensitive repayment. These options make repaying your loans much easier, especially during a time of financial struggle. Again, many people go into default because they didn't know they had any other option. However, if you knew you could lower your monthly payments, then wouldn't you do it to avoid default?
Consolidate Your Student Loans
Another way to avoid going into default is to consolidate your student loans. If you have taken out more than one loan over the course of your college career, you may be faced with many bills that are all due around the same time each month. By consolidating your loans, you can have just one loan payment each month. You might even be able to extend the repayment time on your student loans making your monthly payments smaller. This is one of the best ways to avoid defaulting on your student loans if your payments were just too high before.
Why do Student Loan Defaults Happen?
Student loan defaults happen for a variety of reasons. Sometimes misinformation or a lack of money to repay the student loans are reasons a student defaults on their loans. Borrowers may also move without sending new contact information to their lender or loan servicer so they never receive repayment information. Some borrowers believe that if they didn't complete their degree or if they can't find a job, they don't have to repay their student loans.
Regardless of your situation, student loans must be repaid or other arrangements must be made with your lender or loan servicer to prevent default.
What Does It Mean to Default On Your Loan?
When a student loan has gone into default, it means that the borrower has failed to make payments on time. This does not mean missing one or two payments. This means that you have failed to make payments for 270 days consecutively.
Consequences of Defaulting On Your Loan
You already know that defaulting on a loan is bad, but do you know how bad? Just look at some of the consequences:
- A collection agency will take over your loans
- Legal fees and late fees will be added to the loan amounts you owe
- You could be sued
- Your wages from working may be garnished
- Your federal income tax returned may be kept to offset your student loan debt
- Social Security benefits could be withheld.
- Future federal loans are out of the question.
- Deferments are no longer an option
- It could prevent you from getting credit cards, auto loans, a mortgage, or even a job.
The experience of having a student loan should be a positive one. You get to pay back your debt, build your credit, and make your first venture out into responsible adulthood. Going into default is not the way to do this. In fact, it may very well set you back for years because of it. Don’t let limited funds ruin your credit. There are alternatives to default, some of which might even improve your credit!
The resources below provide additional information about managing student loans:
- National Student Loan Data System
- Direct Loan
- Promissory Note & Entrance Interview
- Forgiveness, Cancellation and Discharge
- Deferment and Forbearance
- Truth About Credit
- FAFSA – Free Application for Federal Student Aid
- Education Planner – A comprehensive guide for funding your college education
- Federal Student Loans
- Federal Student Aid
- Decide How Much to Borrow with the Debt/Salary Wizard7