One of the big reasons for personal debt and eventual bankruptcy is from overwhelming student loans and debt. Here are some tips and advice in order to avoid defaulting on your loans
What is delinquency? Default? What is the difference?
Missing a monthly payment by the due date puts your student loans in delinquency status.
If your loan is 270 days late, then the legal definition changes to default. To say it simply, this is bad. Very bad. The outcome is that being in default almost certainly hurts your credit score and greatly stops you from being able to borrow any money in the future without either waiting a long period of time or going through extensive credit repair.
For example, a mortgage on a house you wish to buy in 5 years, you either will not get the mortgage or at an extremely high interest rate, costing you tens of thousands of extra dollars.
Why is it so bad to be delinquent?
Being delinquent, or worse in default, is very bad and something to avoid at all costs.
- the entire amount owed can become due all at once, including interest and late fees
- Collection agencies often get hired, and can be very unpleasant to deal with (unless you like daily phone calls and visits to your front door)
- Legally you are responsible and legal action can and usually is taken against you. It is possible that you could be responsible for all lawyer bills and court fees. This is not cheap!
- If you’re considering medical school, dental school, becoming a lawyer or any other professional career that requires a license to practise you can be denied your license or renewal of your license until you are repaying your loan again with agreed on terms
- Your job can garnish (withhold) your earnings to pay the loan. This is a very embarassing situation and often everyone finds out.
- Your state and federal tax refunds can be kept and paid towards your loan.
- If considering graduate studies, future student loans will not be available to you.
Deliquency? Who Me?
Now that we’ve discussed delinquency, default, and the consequences of both, let’s go over strategies to avoid either of these happening to you.
Open communication with your servicer is the absolute best way to avoid becoming delinquent or going into default status. There are a multitude of options that servicers provide for you to lower your loan repayment
Know that there is a tax on your time, so to speak. So the lower the monthly payment, the longer it takes to repay your loan, and ultimately the more money you need to spend. However there are many options and it is important for you to discuss with them and find out what options are best for you.
One very important thing to do is update your contact information whenever you move, change phone numbers, or mailing addresses. You do not want to go into delinquency because you moved, got busy unpacking and settling into a new city, and missed your loan repayment since the bill did not arrive in the mail! Same goes for it you are transferring universities!
If you find yourself unable to keep up with the payment schedule, rather than going into delinquency or worse, default on your loans consider applying for a loan deferment until you are able to start repaying the loans on a regular scheduled intervals. Deferment is also known as “forbearance.”
What is deferment?
Deferment is per-determined and agreed upon period where the principal of the loan is postponed.
For example, the subsidized Stafford loan is very comment, and a portion of the subsidized consolidation the interest actually is made by the federal government. There is a grace period of six months upon graduating or leaving your studies (or dropping out) the borrowers are able to start collecting unless there is a loan deferment that meets the regulatory requirements.
If you do apply for deferment, what you should do is to continue to pay the loans until you receive written notice that the deferment is approved. Do not make things worse by taking that chance!
Am I eligible for loan deferment?
Take a look over the list below. It is some of the more common reasons for being eligible to defer federal loans.
You may continue to make payments (we recommend this), but know that any unsubsidized loans will be added to the principal balance upon the end of the deferment period. This usually increases the balance of your total monthly payments. At any rate, below are some of the more common loan deferment reasons
- Economic hardship
- School deferments
- Active duty and service-related deferments
- Educational-related reasons
- Disability (temporary or total disability)
- Public service
- Parental Leave
Forbearance Is Another Option
A borrower who is able to, but chooses to make payments but does not meet the deferment qualifications above may also request forbearance.
What this is, allows you to postpone your payments temporarily for a period of time. Forbearance can work to your advantage, as it lets you halt and reset and delinquency on your account.
Be aware though, that any negative comments on your credit history or credit report remains. (Going through credit repair counseling is one way to help get these negative comments removed from your credit history.)
Another nice thing about forbearance is there are no fees, but it is important to know that interest continues to accrue on your loan principal during the forbearance period.
You can still make interest payments (and we recommend it) at any point of time. The remaining unpaid interest will be added to the existing principal balance. This is known as capitalization of interest, and what it does is increase the amount of the principal balance (starting to see a trend yet?).
Just as how deferment applicants must qualify, the same can be said for forbearance. The most common categories of forbearance include:
- Medical Residency
- Department of Defense Loan Repayment Forbearance (DOD)
- Economic Hardship
- Reduced payment request
- Corporation for National and Community Service Loan Repayment Hardship (CNCS)
- Student Loan Debt Burden