How to Avoid Default on Your Federal Student Loans

Today's guest post comes from Laura Edgar. She is a writer for NerdWallet, a credit card comparison company dedicated to helping young adults find the best student credit cards.

Have you heard the news? The number of people defaulting on their student loans is skyrocketing. According to the U.S. Department of Education, the number of people with education-related loan defaults rose to 8.8 percent in 2010, up from 7 percent in 2008. And this is only a conservative estimate, because it doesn’t take into account the number of students in danger of defaulting in the next few years. If you haven’t made your payments in a while, or are worried you can’t keep up, it’s time to take action. We’re know you’re probably 20-something and broke, but being 20-something and broke and in default is much worse. Whatever your financial situation is, you can still avoid default.

Why is it bad to default?

You may have heard that student loans are considered “good debt”. While it’s true that student loan debt is looked upon more favorably than other kinds of debt, missed payments are missed payments, and defaulting is still very bad, for multiple reasons. First of all, it hurts your credit score. You need good credit for more than just the best credit cards and loans – you may need it to get a job or rent an apartment (landlords and employers are increasingly factoring credit scores into their decision process). Second, student loan debts don’t go away, even if you declare bankruptcy, and the Department of Education has the right to seize your assets if you default (which we’ll get into in a bit). Third, if you default on your loans, you may never get one again. You’ll have to find another way to pay for school if you ever need or want to go back.

How does a loan go into default?

You are considered delinquent on your loan as soon as you miss a payment, and will continue to be until you bring yourself up-to-date on all payments. Your loan will default after you fail to make payments for 270 days, at which point your entire loan will be due in full. If you fail to make payments for 360 days, the loan is transferred to the Default Resolution Group. At this point, the Department of Education can do a number of things to collect on the debt.  They can take your tax return or government benefits, or garnish part of your wages, and they don’t need to take you to court first to do so. They can also sue you, but they probably won’t if you don’t have assets. Still, it’s good to know that they can, and since the normal stature of limitations doesn’t apply, they’ll have an unlimited amount of time to collect on the debt.

How can I keep up with my payments?

First of all, borrow responsibly! You’re borrowing from your future income here; that loan isn’t free money. Think of it this way: you’re hopping in a time machine, visiting yourself 10 years in the future, and asking them, “Hey, can I have $20,000?” Hopefully your future self can afford it. A good rule of thumb is don’t borrow more than you think you’ll make your first year out of school. This doesn’t work for everyone (lawyers typically don’t see payoff for at least a few years out of law school, for example), but it’s a good rule of thumb for most students.

Beyond that, you should also know when your payments are due. If you don’t receive a bill, it’s no excuse for non-payment. Make sure the Department of Education has your most current address on file, or better yet, go to the Direct Loan Servicing website and sign up for electronic statements, or an Electronic Debit Account. With this service, your loan payments get deducted from your checking account automatically, and you’ll get a .25 percent discount on your interest rate too. 

Can I make my payments cheaper?

Yes! Especially if you have multiple loans – see if you can consolidate them. You’ll only have to make one payment, and your new interest rate will be based on the weighted average of all your interest rates, without going over 8.25 percent. Consolidation is free and will lower your overall monthly payment costs. You can qualify for a loan consolidation even if you’re in delinquent or default status, so there’s no reason not to try.

Am I eligible for deferment?

Possibly, and it’s better to look into this sooner rather than later. A deferral puts your loan on hold until a later date, with no consequences. The Department of Education’s database of loan deferment forms is a good place to start doing research. Usually, you need to be enrolled in a federal program or experiencing severe hardship to qualify for a deferment. Are you on active duty in the military? Are you a working mom making minimum wage? Are you unemployed, too sick to work, or below the poverty line? Are you going to school more than half time, or enrolled in a residency program? These are just a few examples of situations that might make you eligible.

What if I still need more info?

If you can’t talk to someone at your school’s financial aid office, try going online to the Direct Loan Servicing FAQ page. Alternatively, you can also contact a Direct Loan customer service representative. For loan servicing, the number is 1-800-848-0979. For loan consolidation, the number is 1-800-557-7392. Good luck!