Recent reports by the Wall Street Journal estimate more than 40% of federal student loan borrowers are not making payments or are behind on their payments. Defaulting on a loan can carry serious consequences, such as: lowering your credit rating, preventing you from buying a house or car, making it difficult rent an apartment, or even getting a cell phone contract. Additionally, the cost of your loan increases because of additional fees and it becomes payable immediately. All of the institutions can take measures to against you to recover the debt, including your school, lender, and federal government. This post aims to help you avoid the pains of default.
First, a few definitions are helpful to understand the default process. A loan is “delinquent” when loan payments are not received by the due dates. Your loan becomes delinquent the first day after you miss a payment and will continue until all payments are made to bring the loan current. (Source: Studentaid.ed.gov). Loan servicers report all delinquencies of at least 90 days to credit bureaus. “Default” happens when you fail to make a monthly payment for 270 days.
So, what steps can you take to avoid defaulting on your federal student loans?
1) Take the time to understand your loan agreement and the loans you receive. This includes reading your promissory note, which is a legal document where you agree to repay the loan according to its terms. This also includes learning the costs of getting your loan, the interest rate, and the repayment terms. You must repay all the loans you receive, even if you do not complete the educational program. A helpful guide in understanding your loans can be found on the Consumer Financial Protection Bureau site: http://www.consumerfinance.gov/students/knowbeforeyouowe/.
2) Manage your borrowing. Students often accept the full amount of loans offered in their school’s financial aid package. However, students should create a budget before accepting their loans in order to figure out how much money they actually need to borrow. Students can then request a lower loan amount via their school’s financial aid office. The student can always increase this amount later if they decide they need the additional funds. Students should also complete financial awareness counseling: https://studentloans.gov/myDirectLoan/counselingInstructions.action.
3) Track your loans online. Keep track of all your loans via: https://studentaid.ed.gov.
4) Keep good records. It is really easy to misplace important loan documents (especially when you don’t need to look at them for years). You should keep the following documents in easy to find file:
- Financial aid award letters;
- Loan counseling materials;
- Promissory notes;
- Amount of all student loans you borrow;
- Loan servicer contact information;
- Loan disclosures;
- Payment schedules;
- Record of your monthly payments;
- Any communications you have with your servicer;
- Deferment or forbearance paperwork; and
- Documentation that you paid your loan in full.
Although it is possible to track down this information several years after receiving loans, it is a difficult, time-consuming process and not always successful.
5) Notify your loan servicer. Your loan servicer manages your loan and processes payments. It is really important to talk to your loan servicers whenever any of the following situations happen:
- You need help making your monthly payments;
- You graduate;
- You withdraw from school;
- You drop below half-time enrollment status at school;
- You change your name, address, or social security number;
- You transfer to another school; or
- You experience a change in your life that might impact your loan payments.
You can work with your loan servicer to pick the best repayment plan for you when any of these events happen. If you do not contact your loan servicer, you run the risk of missing payments and ultimately default. Never ignore delinquency or default notices from your loan servicer! You are much better off working with your servicer to out the best plan of action.