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How to Avoid Defaulting on Your Student Loans

Written by: Kristy Welsh

Last Updated: October 11, 2017

As recently as the early 1990s, most students did not take out college loans. Today, nearly 71 percent of all college students borrow money to pay for college. The typical student borrower graduating with the class of 2016 left college with an average debt of $37,172. And, according to a recent study, recent college graduates are defaulting on federal student loans at the highest rate in nearly two decades — one in seven borrowers defaulting within the first three years.

If you are buried deep in student loan debt, you are not alone, and there are things you can do to avoid defaulting on your loans. Try any one of the tips outlined below before you throw in the towel and default on one or more of your student loans. Your credit score will thank you.

Options to Avoid Defaulting on Your Student Loans

Before you call it quits, here are some ways you can avoid defaulting on your loans:

What is Student Loan Consolidation?

Student loan consolidation pays off the outstanding combined balances for one or more federal student loans and creates a new single loan with a fixed interest rate. One lender holds the loan and you make one monthly payment. The repayment terms depend on the amount consolidated, the type of payment plan you choose, and the length of the loan term. The following loans can be consolidated:

How to Rehabilitate a Loan

Under the loan rehabilitation program, you and your loan holder (or the Department of Education if you have a defaulted Direct Loan) agree on a reasonable and affordable payment plan for nine payments over a ten-month period. In most cases, you sign a rehabilitation agreement specifying payments and responsibilities. A loan is rehabilitated only after you have voluntarily made the agreed-upon payments on-time and the loan has been purchased by a lender. Outstanding collection costs may be added to the principal amount. Loan rehabilitation offers the following:

Please keep in mind:

Make sure that you understand the differences in loan rehabilitation for the different loan programs. For questions on rehabilitation of Perkins loan, please contact your school directly to establish an agreement. For FFEL loans, at the completion of the schedule of rehabilitation payments, a participating lender must agree to purchase the defaulted loan and assume servicing of your loan. You must continue making payments during this time.

How to Determine if You Qualify for Payment Relief

If you have trouble making your student loan payments, contact your loan servicer immediately. You may qualify for some form of payment relief. And it's important to take action before you incur late fees or your credit is affected.

Types of Payment Relief

Federal Interest Subsidies

These options will provide you with payment relief and help you maintain a good credit rating. If you qualify and apply for federal interest subsidies on your loan during deferments, you loan balance will not increase during the deferment period because the government will be making interest payments on your behalf. However, if you do not qualify for federal interest subsidies on your deferment, or if your loan is in forbearance, your loan balance will increase by the amount of unpaid accrued interest.

Problems with Obtaining Payment Relief

It is import to act quickly if you find your student loan payments hard to handle. If you default, or fail to make your loan payments as scheduled, you risk very serious consequences. Your school, the financial institution that made or owns your loans, your state education loan guarantor, and the federal government can all take action to recover the money you owe. They may notify national credit bureaus of your default, negatively affecting your credit record. You could find it difficult to borrow money to buy a car or a house, and you would be ineligible for additional federal student aid if you decided to return to school. The financial institution that owns your loans may ask your employer to deduct loan payments from your paycheck (garnish your wages), and your state and federal income tax refunds could be withheld (tax offset) and applied toward the amount you owe. Also, delayed payment and collection activities could increase the cost of your loan.

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