Credit Infocenter

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:

  • Pay the loan in full. Call and get payoff amounts on your loans and pay them off in full, if you can.
  • Discuss a repayment plan with your lender. You have several ways to repay your loan by making monthly installment payments on your account.
    • Standard Repayment — fixed monthly payments of at least $50 with up to 10 years to repay in full.
    • Graduated Repayment — monthly payments will begin low and increase gradually over time.
    • Extended Repayment — lowers monthly payments over a longer period of time and has a predictable payment schedule.
    • Income Contingent and Income-Sensitive Repayment — monthly payments are calculated as a percentage of your income.
  • Consolidate your student loans
  • Rehabilitate your student loans
  • Determine if you qualify for payment relief

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:

  • Stafford Loans
  • PLUS Loans
  • Perkins Loans
  • Health Professions Student Loans (HPSL)
  • Health Education Assistance Loans (HEAL)
  • Nursing Student Loans (NSLP)
  • National Direct Student Loans (NDSL)
  • SLS Loan (formerly ALAS Loans)
  • Federal Insured Student Loan (FISL)

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:

  • The nine voluntary on-time payments you make while rehabilitating your loans will be subtracted from the maximum repayment term of your loan.
  • Rehabilitating your loan(s) removes the default status of previously defaulted loans at completion of the process. National credit bureaus are notified when the loan is no longer considered in a default status.
  • After the loan has been rehabilitated, you regain the balance of all benefits of the Title IV loan program, including any remaining eligibility for deferment or forbearance, from the date of the rehabilitation.
  • Repayment plans available to other borrowers with the same loan type may be available to you, depending on your qualifying status.

Please keep in mind:

  • The amount of your monthly payment after rehabilitation may be more than the amount you paid while you were rehabilitating your loans.
  • Any interest outstanding at the time your loan is rehabilitated will be added to your current outstanding principal balance, increasing the total amount you owe. Collection costs may also be added to your principal balance, increasing the total amount you owe.
  • Delinquencies reported before the loan(s) defaulted will not be removed from your credit report.

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

  • A deferment is a temporary suspension of loan payments for specific situations such as returning to school, unemployment, disability, or military service. You have a right to defer repayment for certain defined periods.
  • Forbearance is a temporary postponement or reduction of payments for a period of time, as you and the lender or holder of your loan may agree, because you are experiencing financial difficulty.
  • Graduated payment plans provide short-term relief through low, interest-only payments followed by standard principal and interest payments.
  • Income-sensitive or income-contingent payment plans offer payment relief with payments that are a specific percentage of your gross monthly income.

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.