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Why 16% of borrowers default on student debt and how you can avoid it

Two Big Reasons Why Student Loan Defaults are on the Rise

Currently, 44 million former college graduates and attendees owed $1.3 trillion in federal student loan debt, and one of every six of those borrowers were in default. That is a staggering number of Americans who are putting their financial futures in jeopardy.  Another 27% of borrowers are also not repaying their loans on a timely basis and may be headed toward default. (Source: Wall Street Journal)

What’s behind the dramatic rise in student loan defaults? The answer has to do with two factors.

The first is that many borrowers fail to truly understand the serious consequences of default, and second is a failure by the U.S. Department of Education to properly educate borrowers about their payment options.

The Consequences of Student Loan Default

Dealing with student loan debt can strain a tight household budget. Additionally, many people working in public service careers, such as teachers and government workers often have lower salaries, which make repaying their high monthly debt payments a huge burden. While these types of borrowers have dedicated themselves to helping others, without careful planning they can struggle financially. It may be tempting for them to skip loan payments.

After all, it’s easy to see the results of not paying certain bills such as having a home in foreclosure, a car repossessed, or even utilities turned off. It may not be so easy, however, to see the consequences of skipping payments on federal student loan accounts. It’s a misconception that can have dire consequences.

If a federal student loan goes into default, it means the borrower hasn’t made payment in 270 days (9 months). It also means the borrower hasn’t made alternate arrangements for their loan such as requesting deferment or forbearance.

Both deferment and forbearance are when repayment of a loan is temporarily stopped. A borrower may need to meet certain conditions in order to qualify such as during a period of unemployment or while enrolled in a qualified graduate study program. Those who don’t qualify for loan deferment, might still be granted forbearance. While both deferment and forbearance are intended to be temporary, many loan servicers, consolidation companies and borrowers themselves rely on these as long-term “solutions.” These are anything but a solution to a debt problem. With deferment and forbearance, your debt grows as that unpaid interest is added to your loan principal each month. That only makes it more difficult to repay and stay out of default.

The government tends to wait much longer than private creditors to act on a borrower not making timely payments. If a student loan borrower stops making payments without first being approved for deferment or forbearance and their loan goes into default, the federal government can and will take action. A borrower’s credit can be ruined for years – making it hard to buy a house, a car, get approved for an apartment rental or even to apply for certain jobs. Their employer can be notified that their future wages will be garnished. The federal government hires collection agencies and currently more than $160 million in student loan debt is being garnished.

Other legal actions can also be taken against a borrower. At that point, a borrower’s options become severely restricted. Their loan balance is immediately due in full, and they are no longer eligible for repayment plans that might have made their loans manageable. Borrowers should also note that bankruptcy courts almost never discharge federal student loan debt.

Stories of Default

A Forbes article titled “3 Grads Reveal What It’s Really Like To Default On Student Loans” tells the stories of borrowers who couldn’t keep up with their payments. Andrew Josuweit graduated into an economic recession with 16 different student loans. When he couldn’t keep up with the payments, his credit score dropped drastically, and he wasn’t able to apply for new credit or even get approved for an apartment. His parents’ credit scores were also impacted because they had cosigned some of the loans, and this hurt his relationship with them.

In this same article, Kristin Bastian admits that “when life happened, [she] pretended [her] student loans didn’t exist.” She had trouble finding a job after graduation and then had a baby. She was barely able to keep up with her bills so she stopped paying her student loans without considering all her options such as a deferment or other payment plans. When she finally landed a job, her HR manager told her that a collection agency had called, and her wages might be garnished.

Student Loan Repayment Options & Programs

Borrowers have options including several different repayment plans that can make their payments more affordable. In addition to repayment plans, borrowers working in certain professions may qualify to have their student loan debt forgiven, though the list of qualifications can be very difficult to understand.

It can be frustrating for borrowers to know and understand their options, and loan service providers are making it even more difficult. For example, Navient, which holds nearly $88 billion in federal government loans, has the lowest number of borrowers enrolled in an affordable repayment plan. Earlier this year, Navient was also sued by the Consumer Financial Protection Bureau because they allegedly tried to cheat borrowers out of repayment rights.

The Consumer Financial Protection Bureau has also spoken out about the high level of consumer complaints against student loan service providers. Borrowers are being encouraged to do their own research on payment plans and may feel that they don’t know who to turn to for help in evaluating the risks and rewards of each student loan payment option. Also, the government’s process required to apply is also cumbersome and can turn some borrowers away consider non-payment as an acceptable alternative.

For those struggling financially, loan default may feel like the easiest and only way out, but borrowers should know that there are resources that can help. TrustRight Student Loan Services can help borrowers quickly and easily view their payment options and eligibility using the free online Personal Loan Evaluation tool. Borrowers can even apply directly to a federal student loan forgiveness or repayment program with the simplified and automated application process for a small fee.

Borrowers should use free resources such as the Personal Loan Evaluation tool from TrustRight to explore their options. It’s important to understand that default is never the answer.