ExecutiveChronicles.com | Student Loan Default: Its Consequences and How to Avoid It | Unless you’re born with a silver spoon in your mouth or have a full scholarship, you probably had to borrow money to get a college education, as it’s quite expensive. The average yearly tuition for public four-year universities in the U.S. was $10,486 for in-state residents and around $15,873 for students coming from outside of the state in the school year 2019 to 2020. Plus, you also have to consider the $11,510 yearly dorm room costs. Overall, you or your guardians have to pay around $27,383 every year. That’s more than half of the average yearly salary in the U.S. of $48,516.
Graduating from your dream university is one of the most rewarding feelings in the world. However, it also means that you have to work on paying off your student loans. What sucks about these plans is that they come with interest rates that don’t seem like much, but add a lot to your final amount. According to Credible, the average student loan payment is around $393 a month. You have to pay for that on top of your rent, utilities, food, and personal expenses. It’s no surprise that over one in four Americans default on their student loans within five years.
The Consequences of Defaulting
Defaulting means failing to fulfill your obligation to repay a loan. This depends on the terms of the type of loan you got. A William D. Ford Federal Direct Loan Program classifies defaulting as not being able to pay your scheduled loan payment for 270 days. If you enrolled under the Federal Perkins Loan Program, you can be considered to be in default if you don’t pay by your due date. There are a variety of consequences for defaulting, including the following:
- Your subject to acceleration, which means that the interest and whole unpaid balance of your loan become due immediately. You have to pay them in full.
- Depending on the school’s policies, your university may withhold your academic transcript until you fully satisfy your loan.
- You lose your privilege for a variety of payment benefits, like the ability to pick your repayment plan.
- The lender will also report your default to credit bureaus, lowering your credit score significantly. Lenders and banks use credit risk management systems to analyze your credit score. A poor credit score can discourage banks and other lenders from approving your future loans and credit card applications. Rehabilitating your credit score can take months to years.
- If you’re employed, your employer may be required to garnish your wage. This means they’ll withhold a portion of your salary to send directly to the lender to pay off your defaulted loan.
How to Avoid Defaulting on Your Loan
The consequences of loan default can put you in a state of financial disarray. It’ll be difficult to apply for other important loans. Plus, when your wages get garnished, you won’t have as much control over your own paycheck. You should do all you can to avoid this situation. Here are steps you can take to avoid defaulting on your student loans.
- Keep Track of Your Loans – Modern student loans often have online trackers that you can find on the U.S. Department of Education website. Check yours from time-to-time to make sure your payments go through. It also gives you an idea of how much you still owe and how long you’re going to pay for them.
- Keep Your Records Organized – If you find any discrepancies in your loans, you need evidence to back your claim. This is where record organization comes into play. If you have hard copies of your loan disclosures, monthly payment records, payment schedules, deferment paperwork, promissory notes, and more, keep them in an envelope and in a safe place where you can easily access them. If you’ve completed your loan payments, keep the documentation that you’ve done so, in case your lender still tries to send you bills.
- Keep Your Lender Informed – It’s important to keep your lender informed if you run into any sudden changes in your enrollment status or address. This way, they can adjust your loan amount or scheme.
- Explore Other Payment Options – If you’re having a difficult time with your monthly payments, you shouldn’t be ashamed. Let your lender know immediately. They’ll provide you with repayment plans to provide you with more manageable monthly fees. You could also ask to change your payment due date so that it doesn’t coincide with your other bills. You could also ask for temporary relief by deferring your payments for a short period of time, so you can gather the cash to pay for them.
Your student loan is your gateway to affording the high-quality college education you want. However, it can also be a source of trouble after you graduate if you end up defaulting on them. These suggestions help you keep your loan payments in check.