Learn to steer clear of default, your wallet will thank you.
Loan default is somewhere you don’t want to be, and for the borrower just out of school this financial mistake could come with significant costs. John Heath, credit expert and directing attorney at credit repair firm Lexington Law, suggests taking a deferment or forbearance period.
“These alternatives permit you to temporarily stop making payments or reduce your monthly payments,” Heath says could give some breathing space. But borrowers shouldn’t forget that interest continues to accrue while student loans are in forbearance.
Another solution will be to consider switching to an income dependent repayment plan if you don’t want to put your student loan payments on hold. An income repayment plan could make monthly payments more manageable as well.
It may also be worthwhile to ask your lender to provide a grace period in the event of a difficult financial situation, for example an unforeseen job loss or illness. The flip side is that a payment plan extends the repayment period which means higher interest charges. But that’s a better option than defaulting.
What to Do If You’ve Already Defaulted on a Loan
If you’ve already defaulted on a loan, here are some tips for damage control:
- Pay the late amount – This will help you avoid any more negative impact on your credit score, any additional interest, and late fees.
- Get a new payment plan – Call your lender to discuss restructuring your payment plan so you can catch up.
- Contact special programs to get out of default – For federal student loans, consider loan rehabilitation in the short term.
- Negotiate a settlement – If you’ve been in default for an extended period of time, your lender may contact you to accept a settlement for less than what you owe.
- Check your credit reports and scores – Stay up to date with your credit score as you make your payments or if you settle a defaulted loan. Ensure that your payments are reported accordingly.
The most important tip though, would be to avoid doing nothing. Creditors prefer borrowers to take the initiative when it comes to their defaulted loans. If you have any other queries, the Financial Helpers are just a call away.