What Happens When You Default on Student Loans

I recently wrote that Americans now owe more on student loans than credit cards. Given the nation's high unemployment rate and slow economic recovery, it's not surprising that the default rate on student loans also is up. (The default rate for students who entered repayment between fiscal years 2006 and 2007 was 6.7%, the highest since 1998.)

There are ways to ease the burden of student loans. But if you've already starting missing payments and are in default (or expect to go into default soon), Jane Bennett Clark offers these strategies in the upcoming October issue of Kiplinger's Personal Finance:

Miss a single payment on a private student loan and you will go into default. Miss a few federal-loan payments and you will get dunning phone calls, but you won't go into default until after you have fallen 270 days behind schedule. Once that happens, the feds can demand immediate repayment of the full balance of the loan and wring payments from you by offsetting tax refunds and garnishing wages. Don't think Uncle Sam will drop the matter. The feds can and will stalk you indefinitely.

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You can rehabilitate both your loans and your credit, however, by making at least nine timely payments in amounts deemed "reasonable and affordable" by you and the creditor. (Be prepared to differ on what that definition is.) With the payments under your belt, your credit record is wiped clean, and you can enter an income-based program.

Or consolidate your loans with the Direct Loan program, which gets you out of default and into an income-based program almost immediately. The downside: The delinquency stays on your credit report. For more information on strategies, see www.studentloanborrowerassistance.org.

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