What Happens If You Default on Your Educational Loan? Education loans are a great way to fund your higher education. They help you get the required financial support to achieve your academic goals without having to worry about the immediate burden of paying for your education. However, you can face serious financial consequences if you default on your educational loan. This article will detail what happens if you default on your educational loan.
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What is Loan Default?
When you take out an educational loan, you agree to repay the borrowed amount with interest in installments over a specific period. Defaulting on a loan means you have failed to make payments for a certain period, and the loan has become delinquent. Typically, a loan is considered to be in default when you miss payments for a period of 270 days or more.
Implications of Defaulting on an Educational Loan
Defaulting on an educational loan can have severe consequences, such as:
- Negative Credit Score: Late payments, missed payments, and defaulting on a loan will reflect negatively on your credit score. This can make it difficult for you to obtain credit in the future, such as credit cards, car loans, or even a mortgage.
- Collection Calls: Once your loan is in default, your lender will begin calling you to collect payment. These calls can be very stressful and persistent and can continue for months or even years.
- Wage Garnishment: If you default on a federal student loan, the government can garnish your wages to collect the amount owed. This means a portion of your paycheck will be withheld until the loan is repaid.
- Legal Action: If your loan is in default and you fail to make arrangements with your lender, they may take legal action against you. This can result in wage garnishment, property liens, and even the seizure of assets.
How to Avoid Defaulting on an Educational Loan
If you’re struggling to make payments on your educational loan, there are steps you can take to avoid defaulting:
- Contact Your Lender: If you’re having trouble making payments, contact your lender first. Explain your situation and ask about options for deferment or forbearance.
- Refinance Your Loan: Refinancing your loan can help you get a lower interest rate, which can reduce your monthly payments.
- Choose an Income-Driven Repayment Plan: Income-driven repayment plans base your monthly payment on your income and family size. This can help make your payments more manageable.
- Make Extra Payments: Extra payments monthly can reduce loan term and interest.
How to Get Out of Default
If you’re already in default on your educational loan, there are steps you can take to get back on track:
- Rehabilitation: Rehabilitation allows you to make nine consecutive monthly payments on your loan, which will remove the default status from your credit report.
- Consolidation: Loan consolidation involves combining your defaulted loans into a new loan, which can help you get back on track with your payments.
- Settlement: Settlement involves negotiating with your lender to pay a reduced amount to settle your debt. This can be a good option if you can’t afford to pay the full amount owed.
Defaulting on an educational loan can have serious financial consequences. Contact your lender to discuss your options if you struggle to make payments. If you’re already in default, there are steps you can take to get back on track, such as rehabilitation, consolidation, or settlement. It’s important to take action and find a solution that works for you to avoid long-term financial hardship.