Student loan default can damage your credit history for almost a decade; thus, it is to be avoided at all costs! Unlike federal loans, which have a 9-month delinquency period before being considered defaulted, if you miss just one payment on your private loans, you’re automatically in default.
If you have plans to take out a loan for a car, or even get a job in the finance industry, kiss those dreams goodbye if you default. Buying a home with collection debt and/or student loan default on your credit history is virtually out of the question.
According to the Federal Student Aid office of the U.S. Department of Education, the default rate on federal student loans is currently somewhere around 15%. Fortunately for those who took out private loans, the default rate is much lower, primarily due to creditworthiness checks. As of 2014, that rate is around 7-8%.
There are a number of resources and guides online whose goal is to help you get a handle on your student debt. There are even entire websites devoted to the subject. Everyone will have different opinions, and the options out there are certainly not one-size-fits-all.
When you do your research, it’s crucial that you take into consideration your own concerns, and not just what others have to say about such and such company. What worked for them may not work for you.
Before you start doing your research on how to get your debt under control, it’s important that you have an idea of what your debt actually is. Make a list of your lenders, what you owe and to whom, payment dates and terms, etc.
Add up how much you owe. It’s hard to look at this number, but ignorance is not bliss when it comes to debt, so get to work!
What to Know About Your “Grace Period”
Most federal loans, and some private loans, have a “grace period” of repayment that begins right after college. Your lenders understand that you may not get a job directly after you graduate.
This is why some private loans have grace or “interim” periods. This means that the lenders do not require you to begin making payments right after you’ve walked the stage and received your degree.
But don’t get too excited about not having to repay your loans right away. You’re missing the point if you believe this break is entirely selfless on the financial institution’s part – in the end, they’re in it to profit.
The length of the grace period varies among financial institutions; be sure to check with your lender about the terms and requirements of this going down this path.
We are all akin to think that things will be better (and more lucrative) in the future; you’ll finally have a well-paying, stable job, and a handle on your finances. Unfortunately, this is not how things generally play out.
So be careful, because oftentimes interest will accrue during your grace period, and when the period ends, this interest will be capitalized and added to your principal balance. (You can, however, pay this interest during the grace period to avoid capitalization.)
Should I Defer my Loans?
Many recent college graduates have a difficult time landing a job directly after receiving their degrees. Some are compelled to take jobs waiting tables or doing low paying contract positions.
After monthly expenses, the thought of paying off student debt every month seems nearly impossible. That’s why, after you graduate, some lenders offer you the option of waiting a few years before you begin repayment.
Lenders realize that repayment directly upon graduation may not be a feasible option for some, so many have options in place to prevent you from going into default even if you can’t afford to pay down your loans right away. Here’s a brief summary of reasons some private loans will allow you to defer payments:
- You’re still in school.
Whether you are taking longer than expected to receive your bachelor’s degree, or you’ve decided to pursue a graduate degree, this options applies to many.
- You’re a member of the U.S. Armed Forces.
You must be on active military duty or National Guard duty to qualify.
- You’re working in a public-service capacity.
Whether you’ve joined the Peace Corps, AmeriCorps, or the American Red Cross, you can generally qualify for a deferment for the time you’ll be serving.
- You’re entering a residency program following medical school.
This deferment generally concludes after 5 years (at the end of your residency).
- You’re in a period of economic hardship.
Aren’t we all? The qualifications for this type of deferment vary widely among lenders, so check your contract or call.
During this period, your interest will continue to accrue, so watch out—especially if you have a loan with a variable interest rate, because this rate can go up.
You do have the option to pay off the interest as it accrues during your deferment period, keeping your principal balance fairly constant.
If you have multiple private student loans, you’ve probably considered consolidating and refinancing those loans into a new, single loan. For many people, especially those with more than two or three student loans, this is a smart option.
Your multiple loans (private and/or federal) are consolidated into one single balance, making you responsible for just one payment per month.
Consolidation also makes it easier for you to budget your monthly expenses – extending the life of your loan and making you responsible for just one, lower monthly payment. Most consolidation lenders will also not penalize you if you decide to pay off your debt early.
Finally, consolidation loan interest is considered tax deductible, so you’ll save some money on your federal income taxes.
If you’ve already defaulted on your private student loans, you need to contact your lender(s) immediately to work out a payment plan before your information is sent to a collection agency.
The sooner you get on top of this, the less severe the consequences will be. So by all means, don’t put it off!