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.
There is so much student loan information on the internet; it is hard to decipher what is accurate and what is not. What is important to know about student loans? Student loans are often the only way for students to fund their continued education. The Federal Direct Student Loan Program (FDSLP) has become a way for universities to offer their students direct student loans. FDSLP eliminates third-party lenders and offers government loans directly through universities.
What is the most important student loan information to remember?
Even though FDSLP conveniently eliminates the “middle-man,” FDSLP does require that the loans be repaid. These loans can be repaid in various ways to make the repayment process more manageable. Repayment options include standard, extended, graduated, and income-contingent repayments.
Standard repayments require students to pay a fixed monthly amount. The minimum amount for standard repayments on direct student loans is $50. The loans usually must be paid off in 10 years; however, both the monthly payment and payment term are determined by the unpaid balance of the loan.
Extended repayments also require a monthly payment of at least $50. Unlike standard repayments, extended repayments have payment terms of 12–30 years. Extended repayments are more appropriate for students who have more debt. The longer terms allow for lower monthly payments, but consequently, students pay more interest.
Graduated repayments accommodate the low initial incomes of many recent graduates. Graduated repayments allow for minimum payments to start low and to increase slowly over time. The payment term for graduated repayments is similar to that of extended repayments, often between 12–30 years. Like extended repayments, graduated loans offer lower monthly payments but charge more interest in the long run.
Income-contingent repayments are designed to assist students who demonstrate financial needs. Payment amounts for income-contingent repayments fluctuate in coordination with students’ incomes. If the loans are not repaid over the payment term of 25 years, the remaining debt is absolved by the government.