Default on Your Educational Loan: Education is considered a vital aspect of a person’s life. It can enhance a person’s knowledge, skills, and opportunities for better employment. However, education comes at a cost, and many students take out educational loans to finance their studies. While taking out an educational loan is a common practice, not everyone is aware of the consequences of defaulting on it. Defaulting on an educational loan can have significant and long-lasting consequences, which is why it is essential to understand what happens if you default on your educational loan.
What is defaulting on an educational loan?
Defaulting on a loan occurs when the borrower fails to make a payment for a specific period, typically three to six months, depending on the loan agreement. When a borrower defaults on a loan, it can have severe consequences for their credit score and financial stability. For educational loans, defaulting occurs when the borrower fails to make payments for 270 days or nine months.
What happens if you default on your educational loan?
Damage to credit score:
The first and most significant consequence of defaulting on an educational loan is damage to the borrower’s credit score. Defaulting can severely hurt the borrower’s credit score, making it challenging to obtain loans, credit cards, or other financial products in the future. A damaged credit score can also impact the borrower’s ability to rent an apartment, get a job, or obtain insurance.
When a borrower defaults on an educational loan, the lender can take legal action to collect the outstanding balance. This can include wage garnishment, where a portion of the borrower’s wages is taken to repay the loan. The lender can also seize the borrower’s tax refunds or take legal action to collect the outstanding balance.
Defaulting on an educational loan can result in increased debt due to late fees, penalties, and interest charges. This can make it more challenging for the borrower to repay the loan, as the outstanding balance continues to increase.
Loss of federal benefits:
If the borrower has a federal educational loan, defaulting can result in the loss of federal benefits. This includes the loss of deferment, forbearance, and repayment options that are only available to borrowers in good standing.
If the lender takes legal action to collect the outstanding balance, the borrower may be required to appear in court and defend themselves. This can be costly, time-consuming, and stressful for the borrower.
What can you do if you default on your educational loan?
If you default on your educational loan, there are several options available to you. You can:
Contact the lender:
Contacting the lender and explaining the situation can help you negotiate a repayment plan that works for both parties.
Loan rehabilitation is an option where the borrower agrees to make nine consecutive on-time payments to bring the loan out of default.
Loan consolidation is an option where the borrower combines multiple loans into one, with a new interest rate and payment plan.
While bankruptcy is not a recommended option, it is possible to discharge educational loans through bankruptcy. However, this is only available in extreme cases and may not be the best solution for everyone.