The Effects of Defaulted Student Loans

Once a student loan goes into "default" status, the full balance of the loan becomes due immediately. Default status also means that other options for delaying payment, including student loan deferment and forbearance, can no longer be used. The consequences of these unpaid loans can cause problems beyond the loans themselves. Defaulted student loans can negatively affect credit scores, wages, tax refunds, and abilities to qualify for other loans.

Due to the large amount of most student loans, repaying loans in one lump sum is often unmanageable; however, there are other ways to repay the unpaid loans and to repair the damage done by defaulting on the loans. While the Federal Student Aid (FSA) provides guidelines to successfully repay defaulted student loans,

FSA’s guidelines are not the most practical approach. We recommend working with a company that can help you out of debt and through the repayment process. These companies often offer free services to consolidate your debt and to change your loan status to from default to “current,” which will reduce your interest rates and monthly payments and will making your debt seem more reasonable.

The best way to handle defaulted student loans is to prevent them by keeping your student loans current. If you can’t keep your loans current by paying them, then you can keep your loans current by using other methods, including consolidation, deferment, forbearance, and forgiveness.

Consolidating loans can keep your interest rates low and can give you more time to pay them off. By lowering the interest rates and expanding the terms of repayment, your monthly payment is lowered. This makes the loans more reasonable and easier to manage.

Deferment of student loan is another option; however, it is only available under specific circumstances. Deferment can occur for continued education, medical internship, or economic hardship. Deferment is also common when students choose public service. Loan payments are delayed while students are in active service.

Forbearance is delaying the payment of loans. In the short term, forbearance reduces the payments and allows students more time to acquire the necessary funds; however, in the long term, forbearance only delays the repayment process. Forbearance is an option for students in medical internships, with high loan-to-income ratio, or with other special circumstances.

Defaulted student loans can also be forgiven when students engage in certain services. For example, you could have your defaulted loan forgiven if you work for AmeriCorps or Peace Corps, if you teach in low-income areas, or if you do other types of public service.

 

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