Whether you’re fresh out of college, or you’ve been struggling to pay back your student loan debt for several years, it is all too common to be facing a default situation. Few people realize just how much money they’ll need to come up with every month to pay back these loans and it can be difficult to make ends meet unless you have a truly excellent job.
Ideally, steps should be taken to refinance or work out a plan with your student loan debt before you go into default, but this doesn’t always work. If you are in default, don’t panic — you still have some options available to you.
Typically, most loan companies will give you 60 days between their last letter demanding payment until they report the loan as being in default to the credit bureaus. You definitely want to take action before this happens. Having defaulted student loans is a great way to kill your credit score and it can take up to seven years for these black marks to go away.
You need to make at least some effort to resolve your student loan debt. As long as you are paying at least something every month on your debt, you can usually avoid having your loan assigned to a collection agency. It is best to be proactive. Contact your student loan debt holder and explain your current situation. See if they will offer you any options such as payment forgiveness to allow you to get caught up, or a refinance to a better interest rate to help lower your monthly payments.
You can also work out an income contingent plan that will lower your payments to make them more affordable until your income goes up to the point where you can afford to pay more. Your student loan debt holder may also have other options available to you, especially if you have a federal student loan.
A consolidation loan is typically the best way to handle a defaulted student loan, provided you act quickly before your default is reported to the credit bureaus. This type of loan will have a much lower interest rate than a student loan and allows you to consolidate several monthly payments into one easier to pay loan. You may need to provide collateral for this type of loan or have a family member co-sign to help you get an approval.
If you cannot qualify for a consolidation loan, you may want to ask family or friends for a loan to help you get caught up on your payments or to pay off the entire student loan so that you can get back on your feet. Just make sure that you can pay them back to avoid any bad blood in the future.
Failing to make arrangements and meet this issue head on can have serious repercussions. Your tax refunds may be garnished to help pay the loan, and if you work for the federal government, even your wages can be garnished until the loan is paid off. Most lenders will be more than willing to work out something with you to keep the loan in a paid status. It is much better to explore your options now, before it is too late.