by Nathan Rudibaugh
I like imagining worst-case scenarios. Not because of some sadomasochistic drive to fantasize about horrible situations, but because of the preparedness that line of thinking can breed. From charting your way through an economic meltdown to mapping out your zombie apocalypse survival plan, preparing for the nastiest possibilities can make less-than-catastrophic scenarios more manageable.
It is in that spirit that I would like to examine the question: What is the worst case scenario for student loans? The short answer is: default.
Disaster by Default
Default is a loan status that occurs after the borrower misses multiple payment deadlines. For federal loans, this typically happens after 270 days of non-payment. For private loans, the time frame is usually 120 days. In either case, it can be financial calamity for the borrower.
This is because when a loan goes into default:
- the entire loan amount becomes due in full immediately
- the lender may send the account to a collection agency or sue the borrower
- your credit rating will take a hit
- the holder of the loan can garnish your wages, and withhold income tax refunds
- defaulting on a government loan will make you ineligible for future federal financial aid, unless a satisfactory repayment schedule is arranged
Yes, those consequences are severe and pose long-lasting risks to your financial health. But it is possible to recover.
Back from the Brink
For those in the midst of a student loan debtageddon, The Department of Education has a five-point default escape plan:
- Contact the agency that is billing you. If you are unsure who services your federal loans, you can find out by logging in to the National Student Loan Data System. Private student loan servicers send numerous notices containing their contact information. But if you’ve misplaced, buried, burned, and/or shredded those letters, call the financial aid department of the school you attended when you received the loans. They should be able to point you in the right direction. This information is also available on your credit report.
- Explain your situation fully. If you have experienced extenuating financial circumstances, like an inability to secure full-time employment or taking on extensive medical debt, let your lenders know. Default is bad for everyone involved, so lenders are generally willing to work with borrowers to rehabilitate their loans.
- Ask them what options are available to resolve your problem. Federal student loans offer a multitude of repayment plans, including Income Based Repayment, which can help you meet your repayment obligations and still leave you with enough money to buy food that doesn’t come in a Styrofoam cup. And while private lenders are not required to offer as many repayment options as their federal brethren, most student loan companies do offer some repayment flexibility for borrowers in dire financial straits.
- Let them know that you are willing to repay your loan and ask them to work with you. This is not the time to argue against the philosophical underpinnings of the student loan system. The bottom line is that you borrowed money and promised to pay it back. If you are having difficulty holding up your end of the bargain, at least let your lenders know that you understand your responsibilities and that you will do what you can to uphold them.
- Always stay in touch with your lender or collection agency. Lenders are like insecure lovers–If they don’t hear from you they start to worry. Then they start calling and sending you letters. And if you still don’t respond they come to your house and scratch horrible things into the paint of your car while you’re sleeping. Well, the financial equivalent of that, anyway. The moral is, ignoring these people can only make things worse.
An Ounce of Prevention
Sure you can survive student loan default, but it’s better to avoid it in the first place. The best way to do so is by:
- borrowing only what you need
- living within your means while you are in school and after graduation
- knowing who your lenders are, how much you owe them, and when your payments are due
- immediately contacting your lenders if you are having difficulty making your payments
Now we just have to figure out what to do about all these zombies.