Student Loan Default: Don't Even Think About It

If you have student loans, you can expect a rather unpleasant graduation present from the real world: Your lender will want you to start making loan payments. If you don't, you may wind up in default, and the consequences could be serious.

"Goodbye, cool world," say teary-eyed college students on graduation day. They know that they have to say hello to the real and cruel world, a place where bills start appearing for mortgages, autos, and, of course, student loans.

Student loans are due even if you're not gainfully employed, or you stopped taking classes prior to graduation. If you don't make a payment for 270 days, your loan will be in default. If that occurs, you'll quickly learn how cold and cruel the real world can be.

Fail to pay-pay the price

If you fail to make a loan payment and don't have forbearance (only requires payment of the interest on a loan), or deferment (delay of payment for a specified time), you face rather dire consequences. A lender may turn your loan over to a collection agency, and you'll be responsible for the costs of collecting the loan, including attorney's fees.

The fun doesn't stop there. You can also be sued, your wages garnished, and your lender can take your federal and state income tax refund. The government can also deny you access to any more federal aid and withhold any Social Security payments that you're currently receiving.

Needless to say, all this will wreak havoc on your credit score, which impacts your ability to get loans and access credit.

Preventing and emerging from default

The first and most obvious way to stay out of default is to make your payments on time. Keep your lender posted on any address changes that you have. If you can't make your loan payment, contact your lender immediately. You can request a deferment, forbearance, or some other payment arrangement.

If you do fall into default, it's not the end of the world. You can get out of it by making 9 of 10 consecutive payments within 20 days of the due date. Making these payments may require some negotiation with your lender, in which a "reasonable and affordable" payment amount is set. This is considered "loan rehabilitation." Consolidating your delinquent loan may be another option suggested by your lender.

You may also be eligible for additional Title IV federal aid if you've made six consecutive on-time payments.

The consequences of loan default can be severe and have a significant long-term impact on your finances. Even though you can climb out of the jam by making a series of payments on time, it will wreak havoc on your credit score. Choose a healthier economic path: Make your payments on time and stay out of default in the first place. It's the best way to ensure that the real world welcomes you with open arms.